For about 2 years, we have expressed a view that US recession risks were low until late 2024 or early 2025. We are now amidst this period where interest rates remain restrictive whilst economic insulation has largely been exhausted.
The irony of market optimism over the last quarter is the rapid tightening of financial conditions it has produced. Financial conditions are around the tightest they have been since the eve of the GFC. We explore what this might mean for 2025 in our quarterly. We aren't trying to make a forecast, but we are trying to characterise risk.
For 2025, the best offense might just be a good defense
A volatile quarter, with markets at all-time highs, whilst leading indicators remain weak. Unusually, a super-sized rate cut from the Fed, in the absence of a crisis, can be read in one of two ways:
A commitment to achieving a soft-landing
Deepening concerns of weakness in the labour market
This quarterly unpacks:
The volatile quarter that was
China's economic malaise
A run through of leading US labour market indicators
The case for a soft-landing
A focus on Australia and the outsized role of Government spending
Investment comments and positioning.
Please reach out with any questions or comments.
With upside inflation risk lower, and interest rates restrictive, recession risk for late 2024 or early 2025 has increased. The c.55% recession probability from our last quarterly has grown to c.70%.
In the event of recession, Monetary Policy has the ammunition to respond. Investors who protect capital leading into the next recession, should be prepared to pivot when opportunities arise.
The probability of recession arising, and inflation re-accelerating have both being revised up, discussed in full within our economic update. This quarter we also take a walk down memory lane, looking at similarities to 1948 and offer up some killer dinner party conversation fodder... the 'kinked Phillips curve' framework, in our deep dive into labour markets.
The final quarter of 2023 saw markets firm on a soft landing outcome, with a rally in equities and a pricing of interest rate cuts in 2024. Disinflationary forces have seen Central Banks make remarkable progress in returning inflation back towards target. Might this be the goldilocks outcome Central Bankers hoped for and #markets thought impossible just 12 months ago?
This Quarterly discusses the two competing economic scenarios and the key data points that help inform our views on the outlook for 2024. We finish off with a run down on investment positioning, pockets of potential value and our favourite graph from 2023.
#Investment #markets appear caught at an #inflection point. Tight #labourmarkets point to continued #economic progress and a chance at sticking the fabled soft-landing. Other data, in particular household consumption, speaks to the possibility of #recession.
This quarterly we also dig into #China's changing economic paradigm and touch on the scope for attractive vintage years in #privateequity.
As attention spans shorten, we feel there is value in writing and reading something of substance, if only once a quarter (and if of questionable substance)! Chance this #quarterly over your next #coffee break.
It seems we are nearing the end of the interest rate tightening cycle, with the RBA keeping things on hold, the Fed having slowed its rate of tightening, and the RBNZ expected to have put through their final super-sized rate hike.
Widespread weakness can be seen in the US banking sector. A deposit rate paradox has emerged, where raising deposit rates leads to a reduction in net interest margins, causing banks to operate at a loss. While leaving deposit rates near zero increases the likelihood that depositors withdraw their capital.
The rapidly changed interest rate environment now rewards a more traditional mix of bonds and equities, which deliver diversified return characteristics for the first time in some years.
Seemingly temporary #inflation pressures have morphed into structural inflation, driven by a shortage of housing and workers. This has resulted in higher #interestrate expectations and being hugely disruptive to #markets.
#CentralBanks are slamming on the brakes. Where the Fed goes, the world follows, sometimes unwillingly. The sharp change in central bank policy settings has been a catalyst for a decline across all #assetclasses.
Could 2022 be the year market psychology transitions from flawless to hopeless? Find out in the #SnowgumQuarterly.
