Growth worries seem misplaced

12 July 2021

In this week’s Market Pulse, Chief Investment Officer Bernard Swords discusses the market sentiment shift from inflation worries to economic slowdown fears that have dominated market headlines in recent days.

  • The market has moved rapidly from worrying about an overheating global economy sparking off an inflation spiral to a peak in economic momentum starting off a significant slowdown, with 10-year yields in the US dropping below 1.3%. We agree that economic (and earnings) momentum will start to decline (i.e. the rate of increase will start to subside), but growth will still be well above trend.
  • Unusual for this stage of the cycle, it is going to get further fiscal support from the Recovery Plan in the euro area and the potential for an infrastructure bill in the US.  
  • There was nothing through the week suggesting we should alter our course. Growth fears are over-done, if that is what is driving bond yields down. We must remember that bond markets are somewhat distorted by the large presence of central banks and negative interest rates across many parts of the globe. The change in Chinese policy reminds us that authorities everywhere are very mindful of not letting economies slip backwards especially with the Delta variant spreading. We have been positioning for a fading in growth rates but still an above trend growth rate along with the withdrawal of the emergency elements of monetary policy. Nothing has happened to change that position.
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