Latest International economic and market outlook.
The US yield curve has now inverted for the first time since 2006. On the last 7 occasions that this happened, the US economy went into recession every time within 15 months and equities peaked within 6 months, largely due to a decline in real earnings. While this is ominous, it should be caveated by saying that the yield curve has been distorted by years of unorthodox monetary policy and so its use for forecasting events such as recessions has diminished somewhat. Developments have been more positive on the political front. After a 22-month investigation, special counsel Robert Mueller “did not establish that members of the Trump Campaign conspired or coordinated with the Russian government in election interference activities.” However, nor did Mr Mueller entirely exonerate the president on all counts. Instances of cooperation came to light during the investigation, such as the president’s former campaign chairman sharing campaign polling data with an alleged Russian agent. It also remains unclear whether some of Trump’s actions might have constituted an illegal effort to obstruct the investigation. Nevertheless, the Mueller report is good news for both Trump and the US as it should assuage fears that the sitting president was a traitorous accomplice to Russian meddling. The upshot of the report is that, if the Democrats want to remove Mr Trump from the White House, they will have to do so be via the ballot box in November 2020, and not before.
The eurozone economy remains under pressure from weaker global demand and political uncertainty. This is evident in the manufacturing PMI data, which fell from 49.4 to 47.7 in March, its lowest level in more than 5 years. The sharp drop indicates that manufacturing output is now shrinking in the eurozone. Faced with slowing economic growth, the European Central Bank has announced new stimulus measures and a deferral of the start to any normalisation of interest rates. Despite this, investors remain unsettled, partly because the central bank significantly downgraded its growth forecasts for this year, and also because of the downbeat rhetoric of ECB president Mario Draghi, who described the eurozone as being in “a period of continued weakness and pervasive uncertainty”.
Like the eurozone, Japan is feeling the effects of a global slowdown. In recent months it has seen weakness in exports and industrial production, and there is a good chance that the economy could contract again in Q1, which would be the third time in five quarters. The Bank of Japan is facing an increasingly challenging environment, with its 2% inflation target looking more and more unattainable. Indeed, consumer inflation slowed further in February to 0.7% YoY. With all this in mind, the key question for the central bank is no longer when it might retreat from its ultra-loose policy stance, but whether it will need to do more to support the economy.
China is now clearly pursuing policies that should allow economic growth to stabilise, including fiscal easing worth 1.7% of GDP, and credit expansion. In fact, there are some signs that theeconomy is already stabilising. For example, we have seen the first rise in PMI new orders in eight months, while PMI inventories have fallen to the bottom 5% of their five-year range, which implies that destocking is well advanced. Given low unemployment, record-high leverage and a lack of term limits for President Xi, we expect only measured policies to achieve economic stabilisation, rather than a huge stimulus package that accelerates growth but ultimately exacerbates financial imbalances.
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