We are at a crossroads when it comes to incoming macro data. While it was long hoped for some disappointing figures to give the Federal Reserve the final push to move away from the «higher-for-longer» faith, good news is now «just» good news again.
In June, US retail sales were unchanged, while the May figure was revised slightly upwards, from 0.1 per cent growth to 0.3 per cent. Not a fat lot you might say, but the underlying sales figures were a lot rosier than the headline suggests. Adjusted for notoriously volatile components such as cars, petrol and building materials, retail sales rose 0.9 per cent in June, where a cautious 0.2 per cent growth had been expected. I also like to look at the 3-month annualised growth of this «control group», which came out at 3.9 per cent.
As the graph above shows, that last percentage is by no means spectacular, but it doesn’t have to be. At this stage, I think it is important for markets not to fear a possible recession. And where the US consumer, with its huge share of GDP, is always a prime candidate to cause the next recession, the end of excess savings is rightly causing extra attention to consumer spending.
Surprise
On top of this, the reported macro figures have already been a lot worse than what was expected in recent months. As a result, the US Economic Surprise Index fell firmly into the minus.
The chart below shows that this does happen more often. And considering the historically relatively long lead time before the Fed’s major tightening cycles are reflected in the macro numbers, a softening in the US economy is entirely appropriate. Indeed, it has ended rather more nastily in the past. And that is precisely why from now on, positive macro news should also be embraced as such again.
Overstay
Also because the danger from the Federal Reserve has all but disappeared. Chairman Powell’s recent «testimonies» expressed one obvious desire: interest rates should come down as soon as possible. «Waiting until 2 per cent is too late,» it sounds freely translated. And if history repeats itself, central banks will get the wind from now on.
The extremely slow-moving «Owners Equivalent Rent» inflation is finally falling - for newly concluded rents, price growth is often already negative - and the second half of the year is often characterised by inflation windfalls. Incidentally, I don’t think central banks, including the Fed, will be all that bothered should that inflation continue to hover above 2 per cent. A quick look at the absurd budget deficits is enough to understand why.
Rotation
Finally, with a number of rate cuts this year - the Fed Dot Plot says one, the market by now says another fat two, and I’m sticking rigidly to three (or more) - Powell would address another investor concern: concentration. After the bear market of 2022, we have only been watching one show: A.I. & Big Tech.
But at the time of writing, US small caps (Russell 2000) have outperformed their big Nasdaq brothers by 11 per cent in just four sessions. Should that broadening continue, it will be a positive for the stock market as a whole.
More good news please
In short, with the door to lower central bank rates wide open to push the soft landing over the line, better-than-expected macro figures are now old-fashioned good news again. The market reaction to better-than-expected retail sales seems to underline this, although it is still a touch early. Of course, a disappointing inflation figure could confound my theory, although even then I expect Powell to come out of the hat with a rabbit to keep the aforementioned door open.
Jeroen Blokland analyses eye-catching, topical charts on financial markets and macroeconomics in his newsletter The Market Routine. He also manages his own multi-asset fund. Previously, Blokland was head of multi-asset at Robeco. His column originally appears in Dutch on InvestmentOfficer.nl.