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

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

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.

Tyler Durden
Wed, 10/20/2021 – 05:45

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