However, currently both sides are showing a willingness to make a deal, even if it is unlikely to be a grand bargain. To be clear, we expect trade uncertainty and broad tension between the world’s two largest economies to continue for some time. In addition to the efficacy of steps already taken by central banks, recent weeks have seen a thawing of relations between the US and China. Geopolitical Uncertainty Shows Signs of EbbingĪ key reason why policymakers and investors see less need for monetary support is the more positive picture for global trade. Moreover, the market does not seem to be overly optimistic about additional monetary support. Thus, while monetary policy many not be the strong tailwind it has been for most of this year, it is also unlikely to turn into a headwind in the near term, as any tightening would require clear signals of a global economic recovery and strong reflation. Nonetheless, market consensus seems to be coalescing around this week’s probable cut being the last of the “mid-cycle adjustments,” with the odds of additional cuts after this week fading.
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The cut is well-priced by the market (90% likelihood) and Fed speakers have given no indication they will not cut, although forthcoming forward guidance could be interpreted as hawkish by the market if it shifts from an accommodative tone to a more patient, data-driven one. In the US, we expect the Fed to cut interest rates by another 25bps when the FOMC meets this week. Jerome Powell), Christine Lagarde is expected to continue the ECB’s current support when she takes over as President next month. While taking over the reins of a globally critical central bank can lead to a change of mind (e.g. This past week saw the ECB confirm its accommodative policy stance as Mario Draghi’s tenure as President of the ECB comes to an end. Monetary Policy is Unlikely to be a Headwind for Some Time The result of this confluence of monetary and fiscal policy has been resilient consumption and supportive financial conditions for the global economy, not the recession some had feared just a few weeks ago. Stimulation measures on the part of Chinese policymakers have also helped to support the domestic economy, which is the largest contributor to global growth. The turn in global monetary policy from tightening to easing has worked reasonably well since then, as it appears to have largely offset the slowdown, though with a lag. At the end of 2018 and into early 2019, the data suggested the impact from trade uncertainty was flowing through to the real economy, with various measures of global trade worsening.
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Interestingly, when examining the “hard data,” the picture is more positive. These are also the first components to shift when uncertainty is reduced. The weakest components recently have been the “soft data,” or surveys such as purchasing manager indices that are susceptible to dour sentiment due to uncertainty. Importantly, there is a recent pickup in growth evident in both developed and emerging economies and our Growth Nowcaster diffusion index – which measures how much data is improving versus declining – points to upward growth momentum. Unsurprisingly, this is in line with their long-term behaviour (0.8% total return with 63% of the months positive). In previous periods when our Growth Nowcaster was hovering around potential, global equities rose 0.9% on average (in total return terms) over the following month and posted positive returns in 62% of those months. This rate of growth does not eat into capacity constraints or increase slack in the economy, and is therefore a favourable environment for growth-oriented assets. Since April of this year, our global Growth Nowcaster has remained steady at around potential levels, indicating that in aggregate the global economy is growing at a decent rate. We have been communicating for some months now that global macro conditions are modestly supportive for risky assets. What’s Next? Growth Has Shown Resilience and Benefited from Policy Support