By Sam Boughedda
MKM Partners analyst Michael Darda wrote in a research note Friday: "growth is slowing. That might be bullish."
The analyst, writing about the firm's macro strategy, said we "are now faced with an uncomfortable juxtaposition: growth is slowing and risk markets are rallying."
"We can see the growth slowdown in the subtle but steady rise in first-time jobless claims and the sideways movement (over the last three months) in the unemployment rate," wrote Darda. "Parts of the yield curve have inverted, which could be a prelude to the Fed's policy rate (and the Treasury bill rate) moving above longer-term rates later this year. With recession probabilities rising, it's a seemingly odd situation for risk assets to be levitating (risky credit has rallied and the S&P 500 is now more than 9% above the June lows)."
However, he added that maybe the action isn't such a mystery after all. On June 14, MKM surmised that the bulk of the correction in equity prices had been associated with surging long rates, which had vaulted from 1.5% to nearly 3.5% in less than six months.
"Yet, by mid-June, it appeared to us that markets had a much more reasonable path for policy rates priced in compared with earlier in the year. Now, with growth slowing, inflation expectations easing, and terminal policy rate expectations pulling back, risk markets have regained their composure," concluded the analyst.