Unpredictability is likely to undermine the economy still furtherby George Magnus / March 18, 2019 / Leave a comment
Three months ago global stock markets were in a hole, having tumbled by at least 20 per cent from highs earlier in the year. Analysts were falling over themselves with predictions of a recession by 2020. Yet today the US and Chinese markets are around 20 per cent higher than late last year, with Europe and Japan up by a bit less. The FTSE 100 is up by a relatively meagre 10 per cent, but… Brexit, of course. So is the panic over for investors? And, for everyone else, does the market recovery convey optimism, or noise?
The biggest risks last year were in the US and China. In the US, as the sugar high from the tax cuts dissipated, there was concern that the Federal Reserve would raise interest rates too far and choke off what still promises to be the longest-ever expansion (if it keeps going until June). In China, there was strong evidence about a widespread economic slowdown emanating partly from the trade war, but mostly from the government’s policies designed to curb debt and leverage. More recently, though, some of these concerns have lessened.
In January, the Federal Reserve, surprised by the weakening in the economy, sent out a strong message to financial markets that the cycle of rising interest rates—the main policy rate rose 100 basis points last year to 2.25-2.5 per cent—had topped out, at least for now. Expect this message to be repeated at the Federal Open Market Committee meeting later this week. The impact was immediate: 10-year bond yields turned back down from almost 3.25 per cent, and have fallen to about 2.6 per cent. Shorter maturity instruments now discount no likelihood of monetary tightening any time soon, and the US dollar weakened.
As though on cue, recent economic data have been disappointing. GDP in the final quarter of 2018 rose by just 2.6 per cent at an annualised rate, and markets expect weaker growth to be announced soon for the first quarter of 2019. Manufacturing output fell in both December and January, and retail sales fell in three of the five months to January. Equity market analysts are warning that company earnings are liable to deteriorate.
The US economy doesn’t look in immediate danger, but it’s hard…