A Macroeconomic Snapshot from an Active Management Shop
Thornburg’s investment team keeps an eye on the macro but focuses squarely on the fundamentals and portfolio fit of each stock and bond selected. This July 17 macro overview is a sample of an internal weekly note to our distribution team that features big-picture highlights from the week that was.
It’s so much easier to be a bottom-up, fundamental investor than a top-down, macro dowser. The signals derived from analyzing a single security and the business prospects of its issuer are much clearer than those from economic data or index-level valuations, which essentially boil down to mean reversion bets, or the Vegas equivalent of craps. As U.S. Covid infection levels continue to climb to record highs, we saw continued sapping of recent strength in U.S. job openings, causing a flatlining in continuing claims and leaving unemployment at 11.1%. June retail sales at 7.5% weren’t bad but weren’t nearly as good as May’s 18.2%. June Industrial Production was up big from May, housing data were strong and small business confidence gained markedly. But the big U.S. banks have built north of $30 billion in reserves to counter potential loan losses. JPMorgan CFO Jennifer Piepszak explained the bank’s build assumes “a more protracted downturn with a slower GDP recovery and an unemployment rate that remains in the double digits through the first half of 2021.”
Thanks be to Fed: The S&P 500 index is back to where it began the year, the Nasdaq Composite is up 17% year-to-date, yet the 10-year U.S. Treasury yield has remained prostrate at 0.6% to 0.7% since mid-April, though perhaps that’s by tacit “intelligent design” in Federal Reserve Treasury purchases. Former Fed heads Janet Yellen and Ben Bernanke were coy (on 7/17) in suggesting yield curve control “is possible, though not certain.” While U.S. sovereign yields are still above water relative to those elsewhere in the world, interest rate differentials ain’t what they used to be. And if the U.S. economic recovery remains uncertain as long as the U.S. fails to “crush” the infection curve and a Covid vaccine or effective therapeutics are unavailable, it shouldn’t surprise that the dollar is losing ground against its major counterparts. The DXY Index ended the week to 7/17 at 95.9, its lowest level since its March swoon.
Look to the Middle Kingdom for economic recovery and positive yields. China beat expectations in posting 3.2% Q2 GDP growth. There’s no doubt something to be said for “first in first out,” with the CSI 300 equity index also up nearly 11% year-to-date and, most impressively, its 10-year government bond yield having risen nearly 37 basis points over the last three months to 2.94%. No wonder Goldman Sachs sees the yuan strengthening to 6.70 against the USD over the next 12 months from 6.99 currently. Part of that no doubt involves the massive increase in Treasury debt landing on the Fed’s balance sheet, while the PBOC’s balance sheet has barely expanded over the last three months.
But China alone can’t restore global growth. Global fund managers aren’t optimistic about global recovery in general. In BofAML’s July survey, just 14% said they expect a V-shaped recovery, while 44% see a “U” and 30% expect a double-dip “W”. Yet money managers are paid to allocate money, and it turns out Europe is now the most favored destination for equity exposure, with 42% of those polled wanting more euro exposure, given more steady economic reopening amid virus containment and rising prospects for first-ever eurozone-wide fiscal stimulus with the EUR750 billion proposed “Recovery Plan” advancing toward approval.