Global growth continues to slow, but is still positive. Current macro fundamentals are sufficient and suggest a rate cut would be delayed. However, survey data and market messaging signal that rate cuts are more likely and sooner than hard economic data would indicate.
Global growth continues to slow, but is still positive. Since last month, we’ve seen softer U.S. data and weakness in Europe, China and EM.
- U.S. – Following better than expected 1Q19 GDP growth, estimates for 2Q19 growth have been consistently revised lower. Consumer spending looks like it will hold up in 2Q19, but investment, trade and some give back in inventories are likely to drag on growth. The U.S. economy continues to outperform relative to the Eurozone and China. Hard data is still stronger than the survey data, but any follow through is likely to increase the downside risks to growth.
- Europe – Eurozone growth momentum is likely to slow in 2Q19 after better than expected growth in 1Q19. Ongoing weakness in international trade continues to weigh on the manufacturing sector, while the services and construction sectors show resilience and the labor market continues to improve. Rising odds of a no-deal Brexit have dampened the economic growth outlook in the U.K.
- Japan – The outlook for growth remains subdued following a surprisingly strong 1Q19 GDP number. Increasing trade tensions have heightened downside risks. Weakness in the economies of key regional trading partners has also diminished growth prospects.
- China – 1Q19 GDP growth surprised to the upside, but the trade war and weaker economic data signal the outlook is deteriorating. Industrial output growth has slowed and investment has decelerated, creating headwinds for economic growth and optimism for a fiscal and/or monetary response.
Global central banks are embarking on a synchronized policy easing to sustain growth and limit downside risks.
- Fed – Dovish signal at the June FOMC meeting that rate cuts are forthcoming. Persistent low inflation could increase chances of a rate cut.
- ECB – June meeting surprised markets with a dovish message as Mario Draghi winds down his term. This increased expectations for a future rate cut and additional stimulus, leading markets to price in more loosening.
- BOE – Highlighted the risks of a no-Brexit deal at the June meeting, but kept policy settings on hold for now.
- BOJ – The June meeting saw no change in yield curve control targets, however, indicated a willingness to ease further to spur inflation.
- PBOC – A shift to looser monetary policy seems likely to combat economic weakness and improve interbank liquidity.
Rates markets are currently pricing in a 100% chance of a Fed rate cut next month. While the 3M/10Y curve remains inverted, the 2s/10s UST spread has widened to 26 bps from 15 bps one month ago. 10-year Bund and JGB yields moved further into negative territory following dovish signals by their central banks. Globally, inflation expectations have fallen as incoming data has been weaker than expected.
The USD has been resilient recently amid increasing concerns over the global growth outlook. Only very recently has the USD exhibited some weakness, taking its cue from the Fed’s dovish signal. Commodity prices have come under pressure over the last month on a weaker demand outlook, but oil has risen recently amid rising Mideast tensions.
- G-20 Osaka summit at the end of the week
- Escalation of trade war between the U.S. and China or via tariffs on Europe
- U.S. budget deal/debt ceiling
- U.K. PM vote and direction of Brexit
- Wild Cards: Iran tensions; North Korea; Venezuela; new Russia sanctions