Decoding Global Macro Indicators With Goldman’s Abby Joseph Cohen

The global economy is expected to grow at its strongest pace since 2011; world stock market indices continue to hit record highs; investors seem sanguine despite the prospect of tighter monetary policy, and the dollar remains weak. That’s been the start to 2018.

But will these indicators turn during the course of the year? Does the flat U.S. yield curve point to an impending weakness in growth? Will the dollar turn direction and strengthen as US interest rates rise? And is low volatility making investors, particularly in the fixed income markets, too complacent?

Abby Joseph Cohen, veteran American economist and senior investment strategist at Goldman Sachs, spoke to BloombergQuint about her views on global indicators.

Strong Global Growth

The global economy is expected to grow by 3.9 percent in 2018, according to the IMF’s recently released World Economic Outlook. Cohen believes the growth outlook for the current is a extension of the strength seen in 2017. Goldman Sachs’ own estimate suggests growth of 3.8 percent. “There is not an economy out there that is in recession,” Cohen told BloombergQuint.

Will Inflation Return?

Inflation in the United States remains below the Federal Reserve’s target of 2 percent, despite strength in the economy and tight labour markets. Cohen believes that there are both structural and cyclical factors behind the low inflation. From a structural viewpoint we think there are a few things pushing down inflation, said Cohen.

Apart from structural factors, cyclical factor such as slack in the U.S. economy have also played a role in keeping inflation low. Some of these cyclical factors are now turning with a drop in unemployment and an increase in wages, said Cohen while adding that two-thirds of business expenses are related to labour costs which are now moving up.

Flat U.S. Yield Curve

Investors, in recent months, have been focused on the flat U.S. yield curve. A yield curve is considered flat when there is scant difference between short-term and long-term interest rates. In theory, this can indicate that bond investors expect growth (and consequent inflation) to remain flat or even weaken. An inverted yield curve, where long-term rates are lower than short-term rates, is often seen as a sign of an impending recession.

Is this time different? Cohen thinks it may be.

Also Read: White House Provides More Ammunition for Dollar Bears at Davos

The Weak Dollar

Along with the flat U.S. yield curve, the persistent weakness in the U.S. dollar, too, has come as a surprise to some. The dollar weakened more than 10 percent in 2017 and fell further this week after the U.S. treasury secretary said that a weaker dollar benefits the nation from a trade perspective.

Cohen believes the dollar may have been overpriced by the end of 2016. There was such enthusiasm to own the currency due to concerns around other countries that it was overvalued compared to some other currencies, Cohen said.

Also Read: A Doomsayer's Guide to the Dollar and Why It Could Keep Plunging

Dangers Of Low Volatility

Despite global equity indices hitting one record high after another, Cohen believes that markets are not stretched to the point of danger. They are certainly not as cheap as they were though, cautioned Cohen while adding that cheap valuations provide a cushion which may not exist anymore.

Lurking behind headlines of indices surging are concerns about low volatility, which many say cannot last forever. Cohen is one of them. Volatility has been too low not just in the equity markets but also in the fixed income markets, said Cohen.

Cryptics Of Cyrptocurrencies

Cohen, an economist but also a computer science student, says that she is keeping an ‘open mind’ about this asset class. While there may be something to the underlying ledger system, Cohen says she is more cynical about the cryptocurrencies themselves as these have not yet proven themselves to have the attributes of a ‘currency.’ Cohen, however, believes that there could be utility to these in countries where there is lack of confidence in the national currency.