Saxo: 6 Macro Calls For 2020

Authored by Christopher Dembik, head of Macro Analysis at Saxo Bank,

Today, we have published our Outrageous Predictions for 2020. The overall theme is: Engines of Disruption. Frankly speaking, I think the ones we have written this year are among the best.

That being said, I am thinking it is certainly the right moment to share with you my macro calls for next year. I haven’t covered everything, but it think the below list is a good sum up of what we should expect in 2020:

The death of free markets

Please, remember QE is not QE. In order to fix the broken monetary transmission mechanism, the Federal Reserve has already injected $324 billion in the repo market. Central banks don’t want you to know it, but this is the death of free markets. In some market segments, central banks are becoming market makers. This is especially the case for the European sovereign bond market. Based on our calculations, central banks own around 80% of German’s debt. Central bank interventions have led to mispricing, misallocation, complacency and muted volatility. This is clearly the case on the forex market, notably the EUR/USD cross. Nothing is able to move the cross and implied volatility is at an historically low point. However, we cannot live without central bank interventions as it would mean higher rates and lower liquidity which would have disastrous economic and financial consequences in a world of high indebtedness.

The Warren trade is trendy

My belief is that no matter what will happen in the coming months, the next US president will be a populist. In this context, one of the most popular trades in 2020 could be a put option on the S&P 500 index for March expiry. It would be the right way to hedge against Warren risk (in case she wins in Iowa, New Hampshire and on Super Tuesday) but also against new US tariffs against China if negotiations derail.

Old monetary policy debates are coming back

The ECB’s strategic review is likely to address the issue of inflation and the way it is calculated. This is a very old debate and there are a lot of conflicting viewpoints on the topic. The ECB, under Draghi’s leadership, seemed in favor of including housing prices in HICP but, in 2018, the EC advised against it due to the lack of timeliness of the new OOH Index (Ower-Occupied Housing Index). More basically, the ECB might need to bring some clarity about what the objective of inflation really means. It could get rid of the “below, but close to” 2% inflation target and it could adopt a more flexible approach, i.e. a range of 1-3% for instance.

And new ones are emerging

Reviewing the framework will be the best opportunity to include climate change. In that sense, Lagarde’s letter to EP was bright clear: “The intended review of the ECB’s monetary policy strategy…will constitute an opportunity to reflect on how to address sustainability considerations within our monetary policy framework”. In the United States, the economist Stephanie Kelton is justifying MMT with climate change. We should get ready to a huge monetary and fiscal climate package but more likely in 2021 than in 2020.

Economists are good to forecast rolling recession

If recession does not happen in 2019, it will happen in 2020…or in 2021. As a matter of fact, it has become more and more complicated to understand how economic cycles work, partially due to the financialization of the economy. However, as long manufacturing weakness contagion to the service sector is limited, our base case scenario is that we are at the start of a mini-cycle recovery, fueled by central banks, in the context of a late-cycle expansion.

The car market is still a disaster, especially in China

In 2018, the car market was hit hard by the expiration of key tax breaks. In 2019, sales were down due to new emissions standards and the withdrawal of consumer subsidies for electric vehicles. In 2020, the car market will remain sluggish as risks on consumption and global trade will stay elevated.