I recently discussed the point that the US economy is slowing down based on the yield spread. The GDPNow indicator from the Federal Reserve Bank of Atlanta further confirms that the US GDP growth for 1Q16 is likely to be weak.
The chart below shows the GDP growth estimate as predicted by the GDPNow model at different times in March 2016.
From best estimate of 2.3% GDP growth likelihood as of March 11, 2016, the growth expectation has now declined meaningfully to 1.4%. In all probability, US GDP growth for 1Q16 will be below 1.5%.
The reason for discussing likely GDP growth in the recent past is to underscore my point that there is no rate hike likely anytime soon. Further, I don’t expect the fed to hike rates in 2016 as sluggish economic growth remains a concern globally.
I would also watch China’s GPP growth trend closely with 59% CFOs believing that China’s slowdown is the key factor that can trigger US recession towards the end of 2016. If this holds true, investors can expect a potential rate cut (towards the end of 2016) instead of rate hike.
From an investment perspective, it would be best to remain cautious and avoid fresh exposure to US equities. Mohamed El-Erain recently opined that markets can correct by 10% in the coming months and I agree on this point.