From our perspective, recent data has brought the near-term macro trajectory into clearer focus. For some time, the distribution of potential outcomes for inflation and growth was wide: it was unclear whether price pressures (and output) would moderate significantly over the next year. Although uncertainties do remain, it seems likelier today than in months past that the worst of inflation is finally under control, and that growth has reached a steadier state. The Astor Economic Index® ticked up into the above average range.
Employment, and concordantly income driven consumption, remain the pillar of the domestic economic expansion. Non-farm payrolls were up 272,000 in May, a barn burner of a report compared to expectations for 180,000. As a result, we added REITs to our Dynamic Allocation strategy and cut from our shorter duration fixed income holdings. Note that other measures of employment are roughly at their historical averages, with job quits and openings falling, and U6 unemployment ticking up to 7.4% (the same as the month prior). We think the economy is in a solid place, but one can certainly find data that points to softening.
We’ve continued to lengthen the duration of our Active Income portfolio as we feel more solid ground under our feet for the trajectory of rates. High yield valuations are quite stretched, with the spread on the Bloomberg High Yield Index a meager 3.1% over Treasuries. As a result, we trimmed our senior loan position and added longer duration Treasuries. Recent data has validated our thinking – headline CPI printed 0.0% m/m and core was up 3.4% y/y, both below expectations. Make no mistake – inflation will follow a volatile path downwards (shelter, in particular, has proven stubborn), but the trend should remain towards cooling overall. The Fed now reckons that 25bps of cuts will be appropriate in 2024, with four more cuts following in 2025. Markets, as of this writing, see about 40bps of cuts (1 1/2ish moves) this year, as derived from fed funds futures. Regardless of whether the FOMC or markets are right, both are finally dancing to the same tune, which we have been preaching for some time – a gradual return to a normal economy.
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The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. All conclusions are those of Astor and are subject to change. Astor Economic Index® is a registered trademark of Astor Investment Management LLC.
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