Photo: Wikipedia Commons
In a note, Goldman’s Dominic Wilson identifies the key dilemma facing the market right here: The market is priced for growth higher than what we’re seeing right now. And yet it’s priced below where everyone still thinks the economy will be growing by the end of the year.Thus the question “Is this transitory?” is huge.
The US data has showed significant slowing and most of the May activity data has been consistent with growth rates of not much more than 1%. As the Weekly and various pieces from our US economists have laid out, a significant part of the slowdown – but by no means all of it – appears to be attributable to temporary shocks. The most obvious is the hit from Japanese production disruptions, to which we attribute about a percentage point.
The spike in gasoline prices has also had a dampening impact, though its magnitude is unknown. Our baseline is that these temporary factors will reverse in the months ahead and so growth data will look better than they do now. But the exact timing and magnitude of that reversal is uncertain. And as Jan Hatzius has noted, it is clearly possible that the underlying pace of growth is lower than our own forecasts, even after these temporary factors have waned.
So for traders, the matter is:
The tactical trading issue is that with the market priced at 2%, it is priced below where we think the growth picture will ultimately head in the next few months, but above where it is currently printing. Alongside the uncertainty over how much is temporary, this has led us to want to sit on the sidelines for broad risk direction and wait for more information from the June data set. There have been a few recent signs that some of the temporary pressures are beginning to reverse.
Japanese production plans seem to be picking up again and industrial and consumer surveys in Japan have rebounded to a degree. US consumer surveys are more mixed, but we have seen some stabilisation here too alongside the fall in gasoline prices. And jobless claims have also steadied, though at significantly higher levels than before the shocks hit. But it is unclear whether any of these indications will have come soon enough to flow into this month’s US industrial survey numbers or whether instead that will continue to show the impact of earlier shocks.
Meanwhile, this chart from Goldman shows just how fast the pace of growth has collapse in the recent months.
Photo: Goldman Sachs
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