Macro investing was relatively easy for the first two quarters of 2021. Note, of course, nothing is easy with investing. The first two quarters represented the reflation trade coupled with higher inflation. With the global vaccine roll-out and expected opening of businesses, economic growth expectations were high. Differences in the reflation trade were a matter of degrees. With Fed action pushed into the future coupled with a desire to run the economy hot, inflation forecasts were also higher.
Now global macro traders will have to earn their fees for the second half of the year. Continuing to follow the reflation trade coupled with not fighting the Fed seems to be a reasonable base strategy, but there is more room for disagreement over the next two quarters. The current areas of disagreement:
- What does a more hawkish Fed really mean for markets and the economy?
- Is inflation transitory, and will we see an inflation pullback in the second half of 2021?
- Growth reflation has occurred, but will it continue at the current pace?
- Is there more US fiscal stimulus to come in the second half of the year?
- Will a great growth rotation occur in the rest of the world?
- Are markets ready for a change in risk sentiment?
Fading reflation may be the key theme for the second half of 2021. Market reaction is more than responding to growth. It is often focused on acceleration, the second derivative. A slowing of growth expectations may explain a bond rally a stall in equity returns.
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