Global leading indicators dipped further into contraction territory in June, suggesting global growth will continue to slow. Despite weaker momentum, the global economy is expected to grow with consensus forecasts predicting a 3.3% growth rate in 2019.
Data indicates global growth is slowing with the IMF lowering its 2019 growth forecast again in July to 3.2%.
- U.S. – 2Q19 growth came in better than expected at 2.1% following a 3.1% growth rate in 1Q19. Looking forward, consensus estimates are for 3Q19 growth to slow to 1.9%. Consumer spending was strong in 2Q19, while investment and trade weighed on growth. While there is some evidence of slower global growth spilling over into the U.S., the U.S. economy continues to outperform relative to the Eurozone, Japan and China. A key focus will be the strength of the U.S. consumer and labor market being able to offset the downside risks to growth.
- Europe – Growth momentum is expected to slow in 2Q19 after a .4% Q/Q growth rate in 1Q19 that surpassed estimates. The combination of global trade uncertainty and a prolonged downturn in manufacturing sector weighs on the growth outlook. Resilience in the services sector and labor market strength mitigate some of the downside risk. The probability of a no-deal Brexit has risen, but the uncertainty continues to cloud the U.K. economic growth outlook.
- Japan – The growth outlook remains weak, despite an unexpectedly strong 1Q19 of 2.2%. Rising trade tensions, which have negatively impacted key trading partners, continue to stymie growth prospects.
- China – Growth in 2Q19 slowed as expected, but a rebound in June’s activity data provides mixed signals for the outlook. The trade war and global growth slowdown are clouding domestic growth prospects, but policy support is expected to stabilize growth and boost confidence.
Global central banks are about to start a simultaneous policy easing to limit the growth slowdown.
- FED – Dovish rhetoric since the June FOMC meeting has all but assured markets a rate cut will be forthcoming at the July meeting.
- ECB – Signaled an upcoming rate cut and restart of the bond buying program at the July meeting as it downgraded the economic outlook.
- BOE – Brexit uncertainty continues to keep policy settings unchanged, which likely means rates are on hold at the August meeting.
- BOJ – Policy settings are expected to remain on hold at the July meeting, but guidance that reaffirms commitment to easy policy may occur.
- PBOC – Combatting the growth slowdown and enhancing liquidity should translate to a bias toward looser monetary policy.
Rates markets are currently pricing in a strong likelihood of a 25 bps cut at the July FOMC meeting, while some are hoping for a 50 bps cut that would uninvert the short end of the curve. The Fed Funds/10Y curve remains inverted at 31 bps, while the 2s/10s UST spread is positive at 20 bps. Negative government yields proliferate across Europe and Japan as central banks signal easier policy is forthcoming. Inflation remains subdued across the globe as central banks struggle to gain price traction.
Despite the drop in market yields and dovish signals by the Fed, the USD remains resilient. Global growth worries have created a race among central banks to ease policy, which may result in a more muted relative impact on exchange rates. 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. Oil and precious metals prices are up this year, pushing overall commodity prices higher, but weaker global growth has lessened demand for some commodities.
- Unsettled trade war between the U.S. and China and threat of additional tariffs on other countries
- Brexit resolution remains elusive as no deal risk rises
- Rising tensions between the U.S. and Iran
- Wild Cards: North Korea; Venezuela; new Russia sanctions