Global Macro: Weaker Growth Boosts Stocks, Lowers Inflation Outlook
NEW YORK ( TheStreet) - According to a revision lower in U.S. gross domestic product on Wednesday, the economy grew only 1.8% in the first quarter versus the previously estimated 2.4%. Lower growth led to a market rally, as stocks reverted back to their old ways of moving higher on poor data. The belief is that weak growth will keep Federal Reserve stimulus alive and fears of a haste removal will diminish.
But weak growth still weighs on inflation expectations and is strongly negative for inflation-linked assets.
The first chart below is of iShares Barclays TIPS Bond Fund (TIP) over iShares Barclays 7-10 Year Treasury Fund (IEF), which measures U.S. inflation expectations through Treasury market movements. This pair is approaching four-year lows, and gradual to nonexistent growth worldwide continues to push price action to the bottom of its range in 2013.
Weak growth may be seen as a positive catalyst for financial markets today, but in the long run, damage due to central bank reliance could take years to overcome.The next chart is of SPDR Gold Shares (GLD) over CurrencyShares Swiss Franc Trust (FXE), which merely shows the relative strength of gold versus the franc as opposed to its traditional pricing in U.S. dollars. (XLE) over Guggenheim S&P 500 Equal Weight Index Fund (RSP), which measures the relative strength of energy stocks versus a broader stock index. This pair has been on a steady downtrend as major world economies have projected weaker growth and more gradual recoveries over the past few years. Central Bank stimulus has been rampant globally, leading to an increase in the nominal price of these assets, but true strength has been largely absent.
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