With Bridgewater’s Ray Dalio yesterday and Fed vice chair Richard Clarida this morning the latest voices to join the chorus of warnings about the slowing US economy as Trump’s fiscal stimulus fades and turns into a tailwind, it is only a matter of time before the historic growth decoupling between the US and the rest of the world finally converges.
Meanwhile, Wall Street consensus now unanimously expects the global economy to slow next year (in Goldman’s case from 3.8% in 2018 to 3.5% in 2019) led by deceleration in the US and further softening in China.
Growth to slow in 2019E: Real GDP growth forecast, %
Beyond 2019 it gets worse: as Goldman writes in its 2019 Macro Outlook, “the risk of a global recession is likely to rise as more and more DM economies move beyond full employment.”
But while a recession in 2020 is increasingly priced in, with the market now expecting a rate cut in 2020 – if not Q4 – the question is what happens in 2019. As the following chart from Merk Investments shows, the global growth backdrop based on various PMI indexes may be even worse than consensus holds. The good news: most major PMIs remain above 50, i.e. in expansion. The bad news: at the current pace, contraction is inevitable for most developed economies.
One doesn’t need PMIs however: in many cases GDP tells the full story, and in just the past week we saw what BofA called “flash recessions” in three key economies: Japan GDP -0.3%, German GDP -0.2%, and Italy GDP 0.0%. Meanwhile China is also cracking, as its auto sales plunge -12% YoY.
To Bank of America’s Michael Hartnett, who has been bearish for much of the past several years, this means that the resilience of US data, and US credit spreads will soon to be tested.
Which brings us back to the always engaging debate about what is the level of the “Fed Put”?
The answer, according to BofA, is threefold: SPY <$250, HYG <$80, ISM new orders < 50 would trigger the Fed.
And it’s not just the Fed: China export growth would panic PBoC, while US payroll <50K would panic Trump on trade, according to BofA. Why is this important? Because as Hartnett’s Axiom 1 about markets is thatr “markets stop panicking the moment central banks start panicking.“
For now markets are still panicking, perhaps as a result of being massively wrong-footed by their capital allocation YTD: in 2018, there have been $122BN flows equities, $35BN into money market fund, and $24BN into bonds, when in reality investors should have just put it all in 3M Bills as cash outperforms stocks & bonds for 1st time since 1992.
What – to BofA – is the ultimate tell for the Fed to start panicking? The answer: rhe fall of the last bull standing. Following oil collapse, final bear dominoes to drop…HY corporate bonds…
…and after a Q4/Q1 overshoot, the US dollar.
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