Our Head of Corporate Credit Research makes the case against the
popular notion that solid economic data would be bad for markets,
and instead offers a rationale for why now, more than ever, is
the time for investors to root for positive economic
developments.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of
Corporate Credit Research at Morgan Stanley. Along with my
colleagues bringing you a variety of perspectives, today I'll be
talking about why good data … is good.
It's Friday, June 28th at 2pm in London.
One of the bigger investor debates of 2024 is whether stronger or
weaker economic data is the preferred outcome for the market.
This isn’t a trick question.
Post-COVID, a large spike of inflation led to the fastest pace of
interest rate hikes by central banks in over forty years. And so
there’s been an idea that weaker economic data, which would
reduce that inflationary pressure and make central banks more
likely to cut interest rates, is actually the better outcome for
the market. Those lower interest rates after all might be helpful
for moving the market higher or tighter. And stronger economic
data, in contrast, could lead to more inflationary pressure, and
even more rate increases. And so by this logic, bad data is good
… and good data, well, would be bad.
This “bad is good” mindset was prominent in the Autumn of 2022
and again in September of 2023, as markets weakened on stronger
data and fears that it could drive further rate hikes. We saw the
idea return this year, amidst higher-than-expected inflation
readings in the first quarter.
But we currently think this logic is misplaced. For markets, and
certainly for credit, we think those who are constructive, like
ourselves, are very much rooting for solid economic data. For
now, good is good.
Our first argument here is general. Over a long swath of
available data, the worst returns for credit have consistently
overlapped with the worst economic growth. Hoping for weaker data
is, historically speaking, playing with fire, raising the odds
that such weakness isn’t just a blip, and opens the door for much
worse outcomes for both the economy and credit.
But our second reason is more specific to right now. Central to
this idea that bad data would be better for the market is the
assumption that central banks would look at any poor data, change
their tune and come to the market’s aid by lowering interest
rates quickly. I think recent events really challenge that sort
of thinking.
While the European central bank did lower interest rates earlier
this month, it struck a pretty cautious tone about any further
easing. And the Federal Reserve actually raised its expected
level of inflation and projected rate path on the same day that
consumer price inflation in the US came in much lower than
expected. Both increased the risk that these central banks are
being more backward looking, and will be slow to react to weaker
economic data if it materialises.
And so, we think, credit investors should be hoping for good
data, which would avoid a scenario where backward-looking central
banks are too slow to change their tune. I’d note that this is
what Morgan Stanley’s economists are forecasting, with
expectations that growth is a little over 2 percent this year in
the US and a little over 1 percent in the Euro Area for this
year. We expect the economic data to hold up, and for that to be
the better scenario for credit. If the data turns down, we may
need to change our tune.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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