Weekly Stories by Fathom, 25/01/2024

Good morning. Last week the NFP report came way above expectations and painted a strong picture for the US labor market although most of the gains in the past year year have come from jobs additions to the public sector. We also had a strong print from the ISM services, in expansion territory and with sub-constituents painting a healthy mix. So overall the US economy has shown tremendous resilience to higher rates and the economic surprise index is going once again north. I can't help but question the landing narrative, yes we are having deceleration from last year's 2.5 real GDP, but consensus has now moved to 1.5% for 2024 way above the estimations of 0.9 only 3 months ago.

Naturally, the markets have pushed back the timing of rate cuts of central banks but the current cycle has proved that investors consistently price in outcomes that were too dovish. A combination of upside surprises on growth along with tighter financial conditions makes it more difficult for the FED to cut rates aggressively.

The US Congressional Budget Office yesterday projected the country's deficit to increase by 70% in the next 10 years bringing it from 1.6tr to 2.6trn. Interest payments would account for about 75% of the deficit rise with an average rate of 3.4% over that period. Next year alone they are projected to climb to 3.1% of GDP (highest on record). US central government debt to GDP will be more than 100% in 2025 and with that trajectory will be 116% in 2034. I have discussed the worsening state of the US fiscal state before and I still don't see it as a major political topic of discussion. The US is a super open economy, not Japan or China and its policy decisions have worldwide consequences.

In equity land, the positive momentum continues, and most markets are at ATH with inflows and supportive results from some technology and healthcare names. US regional banks are under pressure again (as expected) but the investors look away and bid concept names irrespective of valuation. Honestly, I didn't expect a revival of the 2021 bubble so soon (cloud, data, AI-related, or named so companies), but it is what it is. Small caps are down -3% for the year, value +1%, growth at 7%, and the market aided by its concentration to the MAG7 at 4.8. The concept is simple this time, buy strength/short weakness, and valuations are for accountants.           

Alexandros Tavlaridis