Courtesy of trader Adam Crook, below we present a summary of views from some of Goldman's top traders and strategists with soundbites focusing on from i) last week’s Goldman Currencies & Emerging Markets Macro Conf; ii) how should Fed speak last week shape expectations and market pricing? iii) What signals did we get from the Iowa Primaries, and how is Goldman thinking about the impact of Elections on Markets in 2024? iv) Is the USD fully priced for a “soft landing” and are both tails of the USD-smile fairly priced? v) Where does Goldman we see opportunities in ‘Frontier’ markets?
1. GCEM Virtual Conf: Some Soundbites: GS Currencies & Emerging Markets hosted its Virtual Macro Symposium last week, with 3 days of insightful content. Some stand-out remarks from GS speakers below.
Jan Hatzius (Chief Economist): “… These are the main 3 reasons I have fairly high confidence that 2024 is going to be a reasonably good year from a growth perspective: 1. we expect another strong year for real disposable personal income growth (close to 3%) driven by strength in real labour income. 2. Far from worrying about the long and variable lags of Fed tightening, we think the drag from Fed tightening is now in the in the rearview mirror. 3. The median forecast in the Bloomberg survey still has a 50% probability of a recession in the next 12 months and there’s no good reason to have that kind of forecast…”
Jason Furman (Former Chair of Council of Economic Advisors for President Obama): “… I did not think inflation could come down without a significant weakening in the labor market, but inflation has. I agree with Jan’s forecast for GDP (vs bbg consensus). GDP growth over the last year was very strong however growth of gross domestic income was actually quite weak. I think taking all the data into account, looking at what's happened to the unemployment rate, hourly earnings, etc., it looks like the economy grew a little bit below potential over the last year… My dominant scenario is that wage growth will slow to match 2% price growth, which is roughly where we're at now…”
Dina Powell (Former US Deputy National Security Advisor): on US Election… “… I'm sensing now as we get closer it’s almost a wait and see. Some of the things we already discussed, in terms of approaching some of the national security challenges, the regulatory issues, to Alec's point on the federal Reserve and the leadership there….we are getting closer to a strange pause and seeing what the outcome of the election is…”
Joe Wall (MD in Office of Government Affairs): “… For Haley to make the next step in the campaign, she's got to win New Hampshire and pull off an upset to generate real momentum. Her home state of South Carolina is the next big one (on Feb 24th) and it has a great track record of picking the nominee. The challenge for her is that Donald Trump arguably has a better a much better political infrastructure in South Carolina. He's got the support of the governor (Henry McMaster) and Lindsey Graham. He also has a majority of the congressional delegation and most of the infrastructure in the South Carolina political system is with him…”
Alec Phillips (Chief Political Economist): “… In general, I'd say that presidential years tend to be a little bit weaker ahead of the election in the equity market and then tend to finish a little bit stronger… Overall the Fed is obviously very important, but it's not clear that decisions later this year from the Fed are going to have that much of an impact on economic outcomes that would happen in time to impact the election…”
Anshul Sehgal (Head of US Rates Trading): ”.. A good chance that the Fed end up delivering more than three cuts, and not because od recession fears. The current fiscal stance will carry us through the course of the year (all the more so if the Fed actually does start tapering QT). Simply, I think they’ll deliver more cuts simply because near-term inflation is not going to be that big of a problem … two things I think will be very material to how we trade this year which we don’t have a good handle on right now is commodity prices (especially oil) and rate-equity correlation..”
Raj Venkataramani (Head of Global G10 FX Trading and Co-head of Global Short Term Macro Trading): ”.. short USD trade does have legs, but probably not in the short term (over the next quarter). The way we're playing it is by looking at Z4 pricing in the US – if the market is pricing in 175bps of cuts, it's probably a little bit too much in my mind and I think at that point people put on the long dollar trade. And if there are only 100bps of cuts priced in, people put on the short dollar trade. We're playing that range locally…We like owning vega over asynchronous central bank events. If the US actually does realize a March cut, our economists think that the ECB won’t realize a cut until April – that’s where I think you want to own gamma …”
Anthony Kim (Global Head of Metals Trading): On Gold …”If you look at real rates versus where the price of gold should be, gold is outperforming .. We think a lot of that is attributable to central bank buying, and because of the geopolitical backdrop we're in, we expect this to continue. If we do enter the Fed cutting cycle this year, I think the expectation is that gold will be a beneficiary, there will be a tailwind of central bank buying, and it will continue to outperform what the real rates market is telling you…”
Jason Brauth (Head of Flow Credit Trading): ”… We like being long high yield outright… . Against it, I would look at the tighter parts of credit; being short IG CDX makes sense, given CTAs are close to the longest they’ve been on record and a market sell-off could trigger an exacerbated reversal….”
General Sir Mark Carleton-Smith (Former Head of the British Army): “… It’s interesting the extent to which the Middle East is predestined to be a region to which we all continue to have to return. There are a series of political cycles coming to a conclusion. One is the revolution generation in Iran, and authoritarian regimes are notoriously vulnerable and unpredictable, so we have to see how the moments of transition and succession play out. The second political cycle one might reflect on is Israel: if we weren’t talking about Gaza, we might be talking about a midlife constitutional crisis in Israel… If we find ourselves in a shooting war to try to suppress rocket firing points in Yemen, then we’re going to be chasing that problem and it will be difficult to cut it down entirely, and the danger is that the mission then expands. We must be careful not to overmilitarize our commitment…”
Sir Alex Younger (Former Head of MI6): “… Our base case coming up to the 2024 election is that the Russia/Ukraine war looks like a static situation. The assumptions are that Putin has no reason to negotiate anything other than the cementing of his victory, and there’s a possibility of Donald Trump entering the White House and giving Putin what he wants. There’s also an assumption that Europe and the US find a way to continue to at least sustain some of the support, so it’s only a stalemate because Ukraine continues to receive Western support… I see no prospect of a negotiated solution but I do expect Putin to start talks in that space as a form of political warfare and as a means of undermining unity in the West that already looks like it’s fraying…”
Jared Cohen (President of Global Affairs & Co-Head of Office of Applied Innovation): “… The sense that I have is a lot of what Iran is doing right now is reminding the world where they have proxies, including the Houthis in Yemen, Hezbollah in Lebanon, five different Shia militia groups in Iraq, the Bashar al-Assad regime in Syria, and their allies within Bahrain. Iran is creating a new normal around each of these proxies with what they’re willing to do today and in the future…”
Sayuri Shirai (Professor at the Faculty of Policy Management at Keio University and Former Member of the Policy Board of the Bank of Japan): “… In Japan, I don't expect a hiking cycle anytime soon because economic fundamentals are not strong enough to support a 2% stable rate. However, the BOJ has a chance to normalize monetary policy this year… the negative interest rate will likely be removed, and I believe they will ultimately maintain a 1% rate with a fairly weak economy…”
Andrew Tilton (Chief Asia Pacific Economist): “…We think the fundamental trend growth of the Japanese economy remains a bit below 1% real growth given the demographic headwinds. While some of the inflation we’ve seen has been cost push in nature and while we expect the BOJ to exit negative policy this year, we don’t expect it until H2 (later than market consensus). We see very modest additional hikes in 2025 with the BOJ ending 2025 at 25bps. Effectively, the long-term policy rate will remain quite low, and we believe it will take some combination of stronger macro wage growth (+3%) and sustained inflation above 2% to get a more prolonged tightening cycle…”
Hidehiro Imatsu (Co-Head of Global Interest Rate Products): “…December’s meetings from the BOJ and Fed delivered more clarity around monetary policy going forward. From a practitioner perspective, I agree the short-term interest rate will increase to 0-10bps. Getting to the level of 25bps and 50bps is totally possible as well… we are now seeing Japanese equities starting to plod along which goes to show all combined financial conditions are relevant and creating more uncertainties in the market…”
