Month In Macro

Growth, Inflation & Liquidity Capped On The Upside

Our Month In Macro note aims to share our research team's internal checkpoint process in evaluating the current state of the economy as it pertains to markets. The pages that follow will have familiar content for those who follow our work, but with the added benefit of connecting the dots across all the economic and financial data our systems use to make portfolio decisions.

While we typically reserve our Month In Macro note for Prometheus Institutional, we’ve made this copy available to all paying subscribers. This edition has over 60 pages of detailed macro insights. There will be a lot of familiar data and some not-so-familiar. All of it is structured to be insightful and, most importantly, actionable. Without further ado, let's dive in.

Our primary takeaways are as follows:

• Nominal GDP increased by 0.67% in October, with real GDP growth of 0.45% and inflation rising by 0.21%.

• Liquidity conditions remain ample, but the increased effect of the Fed's balance sheet reduction is beginning to dampen liquidity growth.

• Reflecting the evolution of fundamental dynamics or an expanding economy with disinflation characteristics, equity markets rose significantly, with bonds following and commodities contracted in November. Stocks continue to discount positive earnings expectations, bonds a modest monetary policy easing, and commodities increasing inflationary pressures.

• The combination of these dynamics continues to support equities relative to bonds and commodities.

In this edition of the Month in Macro report, we provide a broad-based assessment of macro conditions and the pricing of asset markets relative to that assessment. The latest GDP data showed that growth remains stable, driven primarily by a sequential acceleration in consumption expenditure. However, while strong consumer spending continues to contribute steadily to nominal growth, business investment in residential and industrial equipment has begun to show significant weakness. The combinations of these pressures continue to suggest an environment where GDP growth doesn't need to contract but remains capped on the upside. Meanwhile, inflationary pressures have begun to fade meaningfully, with industrial activity, shelter, and transportation prices likely to see some disinflationary pressures. Much like GDP, inflation remains capped by the slowing of the economy. Finally, we now have a liquidity environment in which the private sector is firmly driving liquidity conditions. While there has been some slowing in reserve balances and repo activity, this is no threat to the ample liquidity environment. Liquidity may be at a local peak but remains amply elevated.

Growth, inflation, and liquidity are likely to remain capped on the upside but remain positive. Consistent with this assessment, the Prometheus Asset Allocation program maintains long positions in