Last week’s price action on the back of good news out of the US is a microcosm of what this year could look like as a whole. In short, good news is now bad, because it’s potentially too good! Off the back of the positive retail sales data, we saw some weakness in credit, emerging market debt and equities because these markets have traded off the assumption that money will be free forever. A growth spurt this year kills that assumption dead!
For a long time, bad/benign news has been “good” for markets – it’s translated to more central bank liquidity, which has driven markets ever higher. But as the economy normalises and data really starts to get going, we fear last week’s price action will be repeated as rates rise further. In short, it gets to the point whereby we are not being paid enough to hold the risky asset, because the rate on the risk-free asset has moved so much.
To our mind central bankers are underestimating pent up demand. Whilst central bankers around the world are keen to reiterate the status quo of loose monetary policy continuing for some time, we think their hand will be forced sooner than they think because data will be just too good for them to ignore. We expect solid high single digit growth in all developed market economies this year, possibly approaching double digit. As we are seeing at the moment, even during lockdown, data has actually beat expectations! Driven by household savings, just think what will happen when economies actually reopen!