Global leading indicators edged higher in October; but remain in contraction territory. And while global central banks continue to maintain an accommodative monetary policy stance as downside risks to growth persist.
The OECD downgraded 2019 global growth to 2.9%, its weakest level since the global financial crisis.
- U.S.—The economy is still slowing as evidenced by recent data. Industrial production, retail sales, durable goods and leading indicators have all shown weakness recently. Forecasts for 4Q19 growth have been revised lower. The Fed cut rates for the third time this year at the October 30 FOMC meeting. The manufacturing PMI is showing signs of bottoming and easier monetary policy is supporting rate sensitive segments of the economy like housing. A reduction in trade tensions combined with Fed easing has lessened the chances of a recession.
- Europe—The outlook remains weak in the euro area. However, there has been some improvement on the margin for investor sentiment, manufacturing PMI and consumer confidence. The service sector PMI deteriorated, but financial conditions remain easy and the labor market is resilient. Germany avoided a recession in 3Q19. Brexit uncertainty remains a cloud over the U.K. economy as a December 12 election looms.
- Japan—Growth slowed sharply in 3Q19 as exports continued to fall amid trade tensions. Stronger business investment combined with robust consumer spending before the October 1 tax hike propped up growth. Very low inflation keeps the pressure on to sustain monetary stimulus.
- China—The growth environment remains challenging as credit expansion is weak and recent activity data came in below expectations. Recent soft data underscores the need for a reprieve on trade and a need for a deal with the U.S. to stem falling business confidence.
Global monetary policy is still very accommodative as central banks focus on downside risks.
- Fed—FOMC signals a pause in rate cuts and will only move if there is a material reassessment of the outlook.
- ECB—Markets anticipate that monetary policy will remain on hold for an extended period of time.
- BOE—Expectations for a rate cut are starting to increase as the economic data weakens.
- BOJ—Monetary policy is expected to remain accommodative as growth has weakened and inflation has stayed very low.
- PBOC—Recent rate cuts are a signal to markets that policymakers are ready to act to prop up slowing growth.
The FOMC is signaling a pause following the third rate cut of the year in October. Rate markets have repriced to become more in sync with the Fed’s view. The yield curve is no longer inverted with the Fed Funds/10Y curve at 13 bps and the 2s/10s UST spread at 16 bps. Since policy expectations aren’t expected to move much for now, rate and curve changes are likely to be driven more by the term premium. After declining for much of the past year, inflation risk premiums have increased modestly in the last month. Globally, inflation measures remain subdued.
The outlook for the USD is likely contingent upon the strength of a global upturn. If a China-led global reflation takes hold, the USD may experience a downside similar to 2016. However, if the global reacceleration is more muted the USD may not weaken as much. Gold has seen some recent profit taking as the yield curve steepened and trade deal expectations increased; however, it may be in a holding pattern as trade uncertainty has resurfaced. Oil prices rebounded 10% from its October low, but the price recovery hasn’t been steady as mixed signals regarding a trade deal between the world’s two largest energy consumers keep the market on edge.
- U.S./China trade war; threat of additional tariffs on other countries
- Brexit uncertainty and U.K. election
- Rising Middle East tensions—Turkey, Syria
- Wild Cards: Hong Kong, Iran, North Korea; Venezuela; Argentina; new Russia sanctions; global supply chain disruption