20 Apr 2023
Things are getting chippy
The Atlanta Fed’s GDPNow estimate for Q1 GDP (Gross Domestic Product) growth has been heading higher recently, reinforcing what The Economist reported in its cover story this week, “The world’s biggest economy is leaving its peers ever further in the dust.” While that may be a clear sign to contrarians that the long-expected recession is imminent, the resilience of the U.S. economy has been remarkable, and that has pushed inflation estimates for the year ever higher. According to The Wall Street Journal, “On average, economists expect inflation, as measured by the annual increase in the consumer-price index, to end this year at 3.53%, up from 3.1% in the January survey.” One would think that at this stage in the cycle, the estimates would be going in the opposite direction. But after a loud cheer in the wake of SVB’s collapse that rate hikes were at an end, the CME’s FedWatch Tool indicates about an 82% chance that rates will be another 25 basis points higher in May, and the probability of an additional June hike is creeping upward.
To be sure, numerous cracks are showing, including a cooling job market, with large, headline-grabbing layoff announcements every few days, manufacturing weakness, a slump in housing, and now a firm uptick in bankruptcies.
But on the subject of American economic dominance, there are also wheels in motion to not only shore up our supply chains but also to bolster R&D and high-tech manufacturing jobs in the U.S. The Financial Times reports that so far in 2023, “The investment in semiconductor and clean tech investments is almost double the commitments made in the same sectors in the whole of 2021, and nearly 20 times the amount in 2019.”
Expanding on the dominance theme. The times are a-changing to the East. India’s population has likely passed China’s at this point, and China’s population is on course to fall by almost half by the end of the century. The great growth machine of Asia isn’t done yet, but demographics are most assuredly not in its favor.
In the short run, however, China’s economy posted 4.5% GDP growth for Q1 compared to 1Q22, which was ahead of estimates for a 4% improvement, according to China’s National Bureau of Statistics; retail sales came in exceptionally strong.
At about the midpoint for the month (4/17), commodities have rebounded from a poor first quarter and are up 2.6%. International developed and emerging market equities have advanced by 2.1% and 1.5%, respectively, outpacing the S&P 500® (+1.1%) and the S&P 600 (-0.9%). High-yield bonds are up by 0.6%, but all other fixed-income sectors are in the red, with long-term Treasuries bringing up the rear, down 1.8%.
Earnings season is in full gear, and the big banks, which report on the front end, have impressed, with JPMorgan, among others blowing past estimates and proving that the biggest of the big have benefited from the strife among smaller regional banks. Traders will be glued to earnings reports for the next few weeks, trying to glean the market’s trajectory. Longer-term investors will hopefully be thinking about summer vacations and ignoring the news in general.
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| ASSET CLASS | INDEX | INDEX DESCRIPTION |
| U.S. Small Cap Equity | S&P 600 | Measures the small-cap segment of the U.S. equity market. |
| U.S. Large Cap Equity | S&P 500 | Represents US large company stocks. |
| International Developed Equity | MSCI EAFE | An equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada. |
| Emerging Markets | MSCI Emerging Markets | Captures large and mid cap representation across 24 Emerging Markets (EM) countries. |
| Commodities | Bloomberg Commodity | Broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities. |
| High Yield Bonds | Morningstar U.S. High Yield Bonds | Measures the performance of USD-denominated high-yield corporate debt. It is market-capitalization weighted. |
| Investment Grade Corporates | Morningstar US Corporate Bond | Measures the performance of fixed-rate, investment-grade USD-denominated corporate bonds with maturities greater than one year. |
| TIPS | Morningstar US TIPS | Represents inflation-protected securities issued by the U.S. Treasury. |
| Long-Term Treasuries | Morningstar US 10+ Yr Treasury Bond | Measures the performance of fixed-rate, investment-grade USD-denominated Treasury bonds with maturities greater than ten years. |
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