ab25 January 2024Global Research and Evidence LabPowered byUBS Evidence LabYESGlobal StrategyUS Big Data: growth momentum remains stableGrowth momentum remains stable while inflation continues to easeThe January Big Data Growth Nowcast signal points to stability (-0.22) in m/m US growth momentum vs. +/-0.75 acceleration/slowdown thresholds (Figures 1, 6). Relative to December reported data, the US Nowcasts expect a higher Manufacturing ISM (49 vs. 47.4) and a larger rise in Retail Sales ex. Autos & Gas (+0.9% vs. +0.6%). However, Nonfarm Payrolls (200k vs. 216k) should slow a bit and Autos & Gas (-3.4% vs. -6.7%) continue to decline. Please see page 2 for detail. The growth momentum metric anticipates combined m/m growth changes across the monthly indicators, accounting for recent data volatility. Historically, momentum stability favours moderate market risk (Figures 7-10). Though not an input to the growth signal, the Nowcasts also anticipate milder Headline CPI (+0.08% vs. +0.3%) and core CPI inflation (+0.19% vs. +0.31%). Note, that our economists' January CPI forecasts are a little higher: +0.13% headline and +0.22% core. Risk assets do well in stability but the economy is likely in a late cycle stageHistorically, US growth momentum stability benefits risk assets (Figures 7-10). DM equities beat long-term averages, high yield credit delivered solid returns and the yield curve steepened amid weak USD performance. That said, the economy is likely in a late cycle stage and we expect a mild recession later this year. Following the recent risk rally, markets are vulnerable to a sharper growth slowdown, an inflation upside and the Fed pushing back on expected rate cuts priced in. So far, economic data has been resilient and inflation has fallen rapidly, pushing real wage outlooks higher and rates pricing towards Fed funds rate cuts, commencing with 25bp in March. Weaker data will likely be viewed initially as evidence of a soft landing. Therefore, our strategists remain tactically constructive on the US equity market and rates steepeners, cautious on credit spreads and the USD. Larger moves priced on the FOMC & key data release days - US Payrolls and CPIThe January Nowcasts are above consensus for the ISM (49 vs. 47.2 con.) and Payrolls (200k vs. 168 con.) and below consensus for Auto Sales (15.3m vs. 15.7m con.), Figure 3. Combined with slowing inflation these outcomes should continue to support risk sentiment, if they materialise. Stock option prices reflect moderate moves on the data release days (Figure 2). The implied moves are above underlying volatility on the Payrolls and CPI days, reflecting inflation and monetary policy risks being the key drivers of risk sentiment. Our US economists expect the Fed on hold in January and a 25bps cut in March. Figure 1: US Nowcasts signal growth 'stability' (1.5)(1.0)(0.5)0.00.51.01.52.00...
