The Song Remains the Same

The noisy journey from winter to spring in the United States may mask the underlying strength in the U.S. economy. The risk-on environment should remain intact, despite international tensions.

March 19, 2014   |    By Scott Minerd

Global CIO Commentary by Scott Minerd

Edging into spring, we should expect a bumpy and rather noisy journey as weak U.S. economic data caused by a severe winter shows up in economic reports. In fact, the U.S. Federal Reserve on Wednesday retooled its forward guidance on the path of interest rates to give it more flexibility to react to shifting data as needed. However, I believe the underlying U.S. economy is in good shape. As the Chilean poet Pablo Neruda once said, “You can cut all the flowers, but you cannot keep spring from coming.”

While a spring rebound should help U.S. markets climb higher, international tensions remain elevated. Relations between the West and Russia have sunk to levels not seen since the Cold War. Russia’s annexation of Crimea confirms that President Vladimir Putin does not respond to threats, so we can expect ongoing instability from the region which is likely to keep U.S. interest rates subdued.

Chinese economic growth has slowed, prompting Beijing to soften its growth forecasts. Interestingly, the People’s Bank of China has widened the renminbi’s official trading band. Increased volatility can now be expected, as policymakers have greater flexibility to depreciate the currency in an effort to boost exports and maintain employment levels.

Abenomic’s “three-arrows” approach to stimulating more robust economic growth in Japan has stalled. Growth momentum is slowing and Abenomic’s third and most important arrow -- undertaking structural reforms -- is not hitting its target. The Bank of Japan may have to do more to stimulate the economy to offset the headwinds from April’s sales tax hike, Japan’s first major tax hike in 17 years.

Now, a couple of months before many investors will start wondering if they should “sell in May,” we remain in a risk-on environment -- U.S. stock prices should go higher, credit spreads should tighten, and any interest-rate increases should be muted. The rumblings in Crimea, China and Japan have done little to change that outlook. In fact, potential Chinese renminbi and Japanese yen devaluations could export deflationary pressure into the United States, potentially pushing 10-year U.S. Treasury yields lower. On balance, for now it appears that the song remains the same.

Depreciating Asian Currencies Could Ease U.S. Prices

With China’s economic growth slowing, the People’s Bank of China has widened the official trading band for the renminbi, a sign that Chinese policymakers are willing to accept further depreciation of the RMB, which has fallen 2 percent against the U.S. dollar over the past month. RMB depreciation could set off a round of competitive devaluation in Asia, as Japan and other Asian countries try to keep their exports competitive. This would ultimately benefit the United States, as the strength of the dollar is closely tied to import prices and thus, overall price levels.



Source: Bloomberg, Guggenheim Investments. Data as of 2/28/2014.

Economic Data Releases

U.S. Economic Activity Begins to Rebound, but Weak Spots Remain

Chinese Data Calls Growth Target into Question

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.


Fixed-Income Outlook: Walking the Risk Tightrope - Featured Perspectives
February 21, 2018

Fixed-Income Outlook: Walking the Risk Tightrope

Current conditions could persist for some time, but with a possible recession approximately two years away, the time for caution is approaching.

The Market Is Finally Getting the Joke - Featured Perspectives
February 20, 2018

The Market Is Finally Getting the Joke

Investors are coming to terms with the idea that the Fed will keep raising rates because of inflation and economic pressures.

Davos as Contra-Indicator - Featured Perspectives
January 23, 2018

Davos as Contra-Indicator

Euphoria at Davos may be a sign that the market melt up may soon begin to cool.


Forecating the Next Recession 

Forecating the Next Recession

Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”

Macro Themes to Watch in 2018 

Macro Themes to Watch in 2018

In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”

© 2018 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.