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The "Sugar High" Is Over: Nomura Warns US Economy Has Entered "Slowdown" Phase

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by Tyler Durden
Wednesday, Oct 20, 2021 - 05:45 AM

US macroeconomic data has been broadly disappointing for months...

Source: Bloomberg

And that has driven forecasts for GDP growth into the floor. Just yesterday, The Atlanta Fed's GDPNOW model adjusted to forecast just 0.5% GDP growth...

Source: Bloomberg

And at the same time, the market is pricing in an increasingly hawkish trajectory for taper and rate-hikes from The Fed...

Source: Bloomberg

Combining those two factors with soaring 'non-transitory' price changes and the recipe for stagflation is here...

Source: Bloomberg

And it does not look like things are going to improve anytime soon as Nomura's Charlie McElligott notes that their Economic Quadrant work is seeing a critical “phase shift” occurring in real-time...

...as by end of last week, we moved into the “Slowdown” quadrant for the first time since June 2018, and out of the legacy “Expansion” phase (entered into 3/18/21)

This is corroborated by the Nomura US Econ Team’s Weekly Real GDP Tracker showing a significant deceleration in growth from the “sugar highs”...

This has significant (and perhaps surprising) implications for equity returns. According to McElligott's backtest of 1m- and 3m- forward returns at prior instances of transition into “Slowdown” phase, there are some counter-intuitive outcomes - because you actually see “Value” (both Cyclical and Defensive Value) work relative to “Growth” and other duration-proxy factors (Momentum, Crowding, Low Risk, Size)…yet 10Y Yield Sensitive Factor and WTI Crude Sensitive Factor actually lag as well, which is, of course, a surprising contrast to the bullish “Value” trade behavior...

This leads me to believe it may be more about “positioning” here in “shorts / longs” than a “macro” read. And as MacEllligott notes, the caveat of course is that within the backtest time horizon to 2000, we have never seen a supply chain-induced inflation spasm quite like this... but could feed into more factor whipsaw volatility in coming months if said “Slowdown” holds…stay tuned as The Fed is now cornered.

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