Growth in economic activity has remained above trend in the US and accelerated in Japan over the past three months, albeit it has slowed in Europe. Real wages have risen further in the US, and have stopped falling in the UK and possibly also in the euro area. Against this broadly resilient backdrop, it is no surprise that in its Global Outlook, Autumn 2023, Fathom has stuck with the call it made three months ago in its Global Outlook, Summer 2023 that a global recession is no longer expected this year. In the current Outlook, Fathom increasingly sees a world of diverging fortunes: the US leading the way, the euro area lagging, while the UK continues to underperform.
The mood of investors has tracked the resilient macro backdrop, but caution abounds and the overall picture that emerges is one of little conviction. Consistent with the view that inflation may be under control, one-year inflation swaps moved broadly sideways in the US and the euro area over the past three months, but in the UK one-year swaps have risen, reflecting fears that the UK recovery may be derailed, requiring further tightening. Policy rate expectations, as reflected in interest rate futures, were also broadly flat in the US and the euro area over the last three months, again reflecting a growing conviction that the cost-of-living crisis may be behind us and therefore policy tightening may have reached its peak. But the UK’s interest rate futures are more volatile, reflecting —justifiably, in our opinion — a lower degree of confidence that the Bank of England has inflation under control.
Fathom believes that the UK’s recovery is likely to be derailed. The rate rises already in place may well mean that recession is now ‘out for delivery’ (Fathom’s first risk scenario); and there is an additional risk that ‘sticky inflation’ (Fathom’s second risk scenario) may require material further tightening. These risks are reflected in the pricing of the UK 30-year gilt, which has not only failed to bounce back after experiencing its worst performance in four decades in the wake of last year’s disastrous mini budget, but has also managed to produce negative returns and large drawdowns on a scale last witnessed during the 1994 bond crisis.
The picture for the US relative to the rest of the world is not completely rosy — on the contrary, it seems that investors believe that something is amiss in corporate America as earnings momentum remains low relative to the five-year norm. However, the future earnings multipliers of US companies are still six points higher than the rest of the world, a rare event that has happened only about 6% of the time in the last 80 quarters (20 years). Irrespective of the slow earnings seasons forecasts ahead, analysts seem to believe that whatever is brewing in corporate America is likely to have a larger impact on the rest of the world. The old adage “when America sneezes, the rest of the world catches a cold” may still be valid.
What can possibly be brewing in corporate America that may take the world by surprise? In its latest Global Outlook, Fathom examined the corporate sector for signs of trouble, concluding that the increasing number of financially constrained firms may lead to creative accounting that would be detrimental to the real economy in the medium or long term. For further insights, charts and analysis from Fathom’s Global Outlook, Autumn 2023 will be available to subscribers to Refinitiv, an LSEG business, via Chartbook.
The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.
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