Buckle Up For Late Cycle Worries
(4 min read)
The global economy is not out of the woods yet. The latest round of PMI data imply a continued contraction in euro area growth rates. This supports the view that a return to above-trend growth is unlikely. Instead, we are in for a period of sub-trend growth and when the Fed runs out of ammo, a recession could be on the horizon.
Market Pricing Lacklustre Growth With No Recession
The last year has seen advanced economies’ move toward the slowdown phase of the business cycle. Unsurprisingly, cross asset returns have taken note of the shifting gears in global growth. In the US we have seen a modest underperformance of equities vs govies, consistent with a labour market no longer tightening (Chart 1). Despite all this, market measures of risk premium remain extraordinarily low. HY spreads and implied vols in equities and FX remain sub-10% of their historic ranges – rates vol being the exception (Chart 2)...
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