With policy in place, we’re now just waiting for the cycle

Key points

• March macro data have been mixed in the US (manufacturing output contracting and surveys softening vs. elevated in services) and the Eurozone (disappointing Purchasing Managers indices and core inflation vs. more upbeat domestic surveys)
• In March, the US Federal Reserve announced a reduction in quantitative tightening and its “dots” moved to no hike in 2019 and only one in 2020. The European Central Bank reinforced this dovish “put” by lengthening the forward guidance on stable interest rates until at least end-2019
• Meanwhile the Brexit saga kept unabated with the 2-year deadline of Art. 50 postponed to 12 April… without much progress since then
• Data suggests the Chinese economy has not yet broken out of its deteriorating trend (yet)
• Japan still suffers from the external drag with limited rebound ahead
• Finally, we review the recent elections in emerging countries, from Thailand’s first general election since the 2014 military coup to Turkish local elections denting President Erdogan’s popularity and Presidential elections in Slovakia and Ukraine

 

Policy put in place. Mixed macro data with some signs of recovery

The past month has witnessed a renewed dovishness emerge from the US Federal Reserve (Fed) and the European Central Bank (ECB). Each is moving closer to the market-implied monetary path, and by doing so, both are causing markets to have even lower expectations. This supplementary easing intends to answer the macroeconomic data disappointment, which has largely been driven by external factors, at least so far. It also comes at a time of either stubbornly low inflation (in the Eurozone) or increased acceptance of inflation catch-up (in the US), after a long period of sub-target inflation.

Meanwhile, some tentative signs have been emerging, confirming our expectations of sequential activity acceleration – in China first, then Japan and the Eurozone, whilst the US economic slowdown so far matches our relatively benign outlook. For example, China’s latest Purchasing Managers Index (PMI) delivered a positive surprise, with a broad-based rebound in both the National Bureau of Statistics of China (NBS) and Caixin PMIs, to respective six-month and eight-month highs. In the Eurozone, whilst PMIs were disappointing, national business surveys i.e. ZEW, Ifo in Germany and Insee in France, were more upbeat.

Altogether, we maintain our expectation that the global policy put (from more dovish central banks to fiscal stimuli in China and most Eurozone member states) will be enough, and not too late, to sustain these encouraging signs of a rebound. But we do acknowledge that all the data, is not so optimistic.