The Capital Spectator will be taking a long weekend to celebrate the 240-year-old USexit holiday, aka Independence Day for these United States. The usual routine resumes on Tuesday, July 5—directly after the July 4 fireworks have subsided and the ringing in your editor’s ears has receded to a low, dull hum.
Happy Birthday, America!
Next month’s “advance” GDP report for the US in the second quarter is widely projected to show that economic activity will rebound from Q1’s sluggish 0.8% gain (which is expected to be revised up to 1.0% in today’s revision, according to Econoday.com’s consensus forecast). But a higher level of macro uncertainty is clouding the outlook after last week’s UK vote to leave the European Union. The US may be relatively insulated from the economic effects, but not entirely, according to a new Goldman Sachs forecast. The bank trimmed its outlook for US GDP growth in this year’s second half to 2% from 2.25% previously, Reuters reports.
Equity markets around the world took a hit at the end of last week in the wake of Friday’s news that Britain voted to leave the European Union. Stocks almost everywhere posted sharp losses once the dust cleared for the trading week through June 24. US junk bonds, however, managed to post a small gain, delivering the best performance last week for the major assets classes, based on a set of proxy ETFs. US investment-grade bonds ticked higher as well. Otherwise, red ink dominated the field.
● Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe
By James K. Galbraith
Summary via publisher (Yale University Press)
The economic crisis in Greece is a potential international disaster and one of the most extraordinary monetary and political dramas of our time. The financial woes of this relatively small European nation threaten the long-term viability of the Euro while exposing the flaws in the ideal of continental unity. “Solutions” proposed by Europe’s combined leadership have sparked a war of prideful words and stubborn one-upmanship, and they are certain to fail, according to renowned economist James K. Galbraith, because they are designed for failure. It is this hypocrisy that prompted former finance minister Yanis Varoufakis, when Galbraith arrived in Athens as an adviser, to greet him with the words “Welcome to the poisoned chalice.”
The shocking news that the UK voted to leave the European Union has triggered a new phase of risk-off sentiment around the world. It’s anyone’s guess how this all plays out, but the initial reaction is deeply bearish. Yes, it could all be overblown, but the crowd is inclined, once again, to run first and ask questions later. “This is the biggest shock to European politics since the fall of the Berlin Wall,” Rob Ford, professor of politics at Manchester University, tells Bloomberg.
Economic activity in the US continued to decelerate in May, according to this morning’s update of the three-month moving average of the Chicago Fed National Activity Index (CFNAI-MA3). Last month’s reading slid to -0.36, the lowest in nearly four years. Despite the recent downtrend, CFNAI-MA3 remains above the tipping point of -0.70 that marks the start of a new recession, according to the Chicago Fed’s guidelines. By this standard, the economy was still expanding last month, although at a rate that’s well below the historical trend. In short, macro momentum has dropped to a dangerously slow pace.
Former hedge fund manager Raoul Pal is a fan of the ISM Manufacturing Index. In fact, the one-time co-manager of the GLG Global Macro Fund in London puts this widely followed benchmark at the center of his analytical universe for all things related to global macro investing. “The ISM is our best guide to the business cycle,” he says in a new 40-minute video. The index is regularly featured in his monthly newsletter, The Global Macro Investor. Pal’s reasoning for using this index inspires a fresh look at how the ISM numbers stack up for estimating recession probabilities in the US.