Summary

The presentation by Steve and Neil focuses on the US Macro Policy and Economics. Steve begins the presentation discussing the situation on the ground in the Russo-Ukranian war. He believes there will be a big impact on the negotiating leverage from May 9th. Steve goes on to say there is going to be prolonged conflict, but that the diplomatic solution will be the most likely outcome. However, there are many parties at the table. Steve says that Vladimir Putin is not likely to come to a diplomatic solution without the removal of sanctions. If Taiwan’s lesson from this is to bolster its defences, China’s going to feel like its going to be more difficult to make a quick invasion. Steve believes China could escalate that invasion. Steve thinks it could potentially happen in the next few years.

Looking at trade, there is a trend away from globalisation, more towards re-shoring or near-shoring. For the US, they are looking for more trusted partners and allies to work with in supply-chains. Another trend mentioned by Steve is between the US and the EU using higher climate standards as a way to force other countries out and pursue these protectionist measures.

With regards to Congress coming back next week, two things they will focus on is an additional round of Covid relief funding; and also the China competitiveness bill, which is something that provides $52 billion dollars in chip production in the US. A lot of political headwinds are going against the Democrats right now and the Republicans only need to gain 5 seats in the house. The senate is going to be much more Republican seats up this time. Despite having fewer seats, more Democrats in competitive races really puts their control here at risk. By early summer, when we get head-to-head polls we’ll get a better idea of what’s likely to happen in the Senate. Steve doesn’t think Nancy Pelosi will come back. If Republicans win, Pelosi will likely step down, which will create a special election and then she’ll allow her daughter to replace her in that limited time there.

At this point, the presentation turned to Neil’s discussion of the US economy. Neil’s view of the remainder of the year is that we’re at the peak for Fed Hawkishness; we’re at the peak in terms of how worried investors and people are about recession; and we’re at the peak in terms of inflation risk for 2022.

Neil states that when you look at inflation less food, energy, shelter and used cars, it actually rose in March, so super core inflation is still firming. The underlying inflation story in the US is getting worse, not better. The Fed is going allow inflation to remain firmer for longer. Neil assumes for at least the next 18 months the Fed is going to trade higher unemployment for higher inflation in order to keep the unemployment rate from rising more. Part of what’s happening right now is trying to figure out where the neutral interest rate is. Neil believes it’s a lot higher than 3%.

Neil believes there is no evidence to think the economy is going into recession. If you look at consumer credit card data, it’s running up about 13% against a pre-pandemic baseline, so consumers are spending money. One of the reasons is that Covid is becoming more under control. Neil believes labour markets will continue tightening between now and the end of the year. Job openings remain high, and firings remain low.

The industrials sector of the economy remains strong as well. Neil finally mentions that inventory levels remain too low. There is more room for inventories to play catch up over the next couple of quarters. We haven’t really seen a meaningful pick up in completion of housing in the US. That means units under construction will continue to rise, which will help the market and put it into better balance and put some pressure off prices.

Neil finishes by saying 12 months from now the EU and China economies are going to look a lot better, which begs the question: How is the US economy going to be in recession when these two economies are accelerating? That’s one of the reasons why the market is pricing out recession risk in 2023.

Topics