E We're Now At A Macro Crossroads

Macro is at a complete crossroads. No one scenario “has” to happen. The macro picture (economy & market) can go in many different directions from here. Which direction is dependent on a number of black boxes that we simply can’t see into. These are:

  • When the Fed decides to raise rates next

  • China’s management of the yuan (managed deval, break the peg, or fight to maintain peg)

  • Presidential and down ballot elections (which parties control the house, senate, and executive branch)

We can’t know the outcome of any of these. But we don’t need to. We just need to form multiple hypotheses for different outcomes and update them as new information becomes available.

The Fed is playing a commendable game of mixed signaling. Some Fed members claim a hike is imminent while others say they will let things run hot. Their intent is keep the market on its toes; cooling speculation while buying time to raise rates.

The market is currently pricing in a rate hike in December. I believe a December rate hike is also likely but the weighting given to that hypothesis could drastically change over the next month depending on how econ data looks.                                                     

One of these data points is GDP, which comes out this Friday.

Both the New York Fed Nowcast and Atlanta Fed’s GDP Now are pointing towards 3rd quarter growth coming in at around 2%.

This is below the blue chip consensus which is expecting GDP to be between the 2.5-3% range.

(Click on image to enlarge)

And here’s Markit’s take on its expectations:

In the second quarter, the US economy grew 1.4%, with inventory investment subtracting 1.2 percentage points from real GDP growth. IHS Markit predicts an expansion of 1.8% in the third quarter as the drag from inventories will subside and official data point to US industry seeing signs of renewed life. However, the trend in consumer spending weakened in the third quarter and latest PMI results signal that there remain some downside risks to the outlook.

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Currency Trader 4 years ago Member's comment

Excellent article and a fine addition to this site.

Macro-Ops 4 years ago Author's comment

Appreciate it!