Global Macro: Weaker Growth Boosts Stocks, Lowers Inflation Outlook

TheStreet.com

NEW YORK (TheStreet) - According to a revision lower in U.S. gross domestic product on Wednesday, the economy grew only 1.8% in the first quarter versus the previously estimated 2.4%. Lower growth led to a market rally, as stocks reverted back to their old ways of moving higher on poor data. The belief is that weak growth will keep Federal Reserve stimulus alive and fears of a haste removal will diminish.

But weak growth still weighs on inflation expectations and is strongly negative for inflation-linked assets.

The first chart below is of iShares Barclays TIPS Bond Fund over iShares Barclays 7-10 Year Treasury Fund, which measures U.S. inflation expectations through Treasury market movements. This pair is approaching four-year lows, and gradual to nonexistent growth worldwide continues to push price action to the bottom of its range in 2013.

Weak growth may be seen as a positive catalyst for financial markets today, but in the long run, damage due to central bank reliance could take years to overcome.

The next chart is of SPDR Gold Shares over CurrencyShares Swiss Franc Trust, which merely shows the relative strength of gold versus the franc as opposed to its traditional pricing in U.S. dollars.

The Swiss franc is considered a safe-haven currency that outperforms when markets decline. It is less volatile than other currencies and works well for pricing commodities in order to determine commodities' true strength.

The chart below shows that gold has been losing demand heavily since the beginning of this year. As growth projections have weakened, investors have lowered their long-term view of inflation.

With lower inflation expectations, investors become less inclined to hedge their portfolios for inflation risk. As long as that remains the case, common inflation hedges such as gold will decline.

The final chart is of Energy Select Sector SPDR over Guggenheim S&P 500 Equal Weight Index Fund, which measures the relative strength of energy stocks versus a broader stock index.

This pair has been on a steady downtrend as major world economies have projected weaker growth and more gradual recoveries over the past few years. Central Bank stimulus has been rampant globally, leading to an increase in the nominal price of these assets, but true strength has been largely absent.

Markets realize the growth in commodities has been artificial, which has accounted for the relative weakness seen below. Until China, Europe, and the U.S. can return to self-sustaining growth, cyclical sectors like energy will continue to underperform.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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