The Macro Report | July 2017

The transition from tranquility

A bit surprising amid widespread stability in current economic readings, our outlook switched to a risk-off environment in June. The month generally brought confirmation that the United States continues to exhibit late-cycle characteristics while Europe, which often lags the global cycle, remained more upbeat. We nonetheless see some significance in the dip in the risk appetite, in part because of the outperformance of risky assets relative to bonds. This divergence appears unsustainable, and a trigger could cause a reversion in risky assets.

Two risks are especially worth keeping in mind as we move into high summer: the advances in weapons development by North Korea and changes in thinking expressed by a number of central banks. Of somewhat less concern but still worthy of comment this month is Washington’s lack of progress on fiscal policy and a shake-up in Saudi Arabia’s leadership.

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While the fundamentals of the global economy remain positive, an uptick in real interest rates offers a taste of the potential for policy error.