Global Growth Surprises Ahead

| About: SPDR S&P (SPY)

Key points

  • Our new economic indicator implies positive growth surprises ahead. Separately, we have cut our short-term view of U.S. munis to neutral.
  • Daily moves between U.S. stocks and bonds have become unusually correlated lately, highlighting near-term diversification challenges.
  • We see the U.S. Federal Reserve (Fed) on hold this month but believe a late 2016 interest rate increase is very likely.

We don’t expect global economic growth to be as soft as consensus estimates. Why? Our new BlackRock Macro GPS indicator implies positive growth surprises may be on the horizon.

Chart of the week
BlackRock Macro GPS, 2015-2016

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The blue line in the chart above shows consensus estimates for G7 gross domestic product (GDP) growth over the next 12 months. Our GPS indicator (the green line above) represents where consensus estimates could be in three months' time. The GPS suggests current consensus growth estimates may be too pessimistic, potentially helping underpin investor risk appetite.

Tracking growth surprises

The BlackRock Investment Institute’s research team led by Jean Boivin and BlackRock’s Scientific Active Equity team co-developed the new Macro GPS to gauge how growth expectations could develop over the next three months – a key driver of financial markets. “Nowcasting” models for estimating GDP generally use traditional macroeconomic data. The GPS goes further by also incorporating big data insights, from Internet searches and corporate conference call transcripts to traffic patterns.

Country-specific GPS indicators show the recent deterioration in consensus expectations may have gone too far in the U.S., Japan, Germany and Italy. This suggests potential upside surprises. The UK GPS implies that UK growth expectations should stabilize, with weakness in the big data component offsetting stronger traditional indicators. Overall, the G7 GPS has softened since June’s Brexit vote, but it shows the global recovery should grind on with better-than-expected, if still-sluggish, growth.

Bottom line: Growth surprises could provide a boost to risk appetite in the months ahead, keeping a 2016 Fed rate increase in play. That could also lead to higher long-term Treasury yields and a steeper yield curve. We prefer credit over duration. Separately, we have downgraded our short-term view of U.S. municipal bonds to neutral due to richer valuations and higher Treasury yields.

  • Global stocks slid as a rise in long-term bond yields rattled investors. The sell-off hit emerging market equities and currencies.
  • Equity volatility jumped from low levels. The one-month correlation between the S&P 500 and 10-year Treasuries neared decade-highs as both stock and bond prices fell.
  • China released a spate of better-than-expected August data that showed the country’s housing boom and government-led spending are supporting growth. U.S. August retail sales disappointed.

Global snapshot

Weekly and 12-month performance of selected assets

Equities Week YTD 12 Months Div. Yield
U.S. Large Caps 0.5% 4.7% 7.2% 2.2%
U.S. Small Caps 0.5% 9.0% 5.8% 1.4%
Non-U.S. World -2.5% 3.4% 1.9% 3.2%
Non-U.S. Developed -2.5% -0.7% -0.9% 3.4%
Japan -2.2% 0.3% 5.9% 2.4%
Emerging -2.6% 13.6% 10.2% 2.6%
Asia ex-Japan -2.5% 10.8% 11.7% 2.5%
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Bonds Week YTD 12 Months Yield
U.S. Treasuries -0.1% 4.4% 4.9% 1.7%
U.S. TIPS -0.2% 5.9% 5.9% 1.7%
U.S. Investment Grade -0.3% 8.1% 8.6% 2.9%
U.S. High Yield -0.6% 13.7% 8.2% 6.5%
U.S. Municipals -0.4% 3.8% 6.4% 1.8%
Non-U.S. Developed -0.5% 11.5% 9.8% 0.5%
Emerging Market $ Bonds -1.1% 13.1% 12.6% 5.2%
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Commodities Week YTD 12 Months Level
Brent Crude Oil -4.7% 22.8% -8.0% $45.77
Gold -1.3% 23.5% 17.0% $1,310
Copper 3.3% 1.8% -11.0% $4,788
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Currencies Week YTD 12 Months Level
Euro/USD -0.7% 2.7% -1.2% 1.12
USD/Yen -0.4% -14.9% -15.2% 102.29
Pound/USD -2.0% -11.8% -16.1% 1.30
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Source: Bloomberg. As of September 16, 2016. Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Barclays U.S. Corporate Index; U.S. high yield by the Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Barclays Municipal Bond Index; non-U.S. developed bonds by the Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

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This post originally appeared on the BlackRock Blog.