KEY UPDATES FROM MARKETS AROUND THE WORLD

Paul Gruenwald, Chief Economist, S&P Global Ratings

Transcript

1. 2019 Global Macro Is Autumn Coming or Is Winter Coming? Paul Gruenwald Chief Economist S&P Global Ratings April 2019
2. Prelude: Global Economy Not Following Script • 2019 was supposed to be a year featuring a healthy and necessary slowing of global growth, led by the US and China. • US. The Federal Reserve was to continue to normalize rates and US growth was to decelerate toward 2%. • China was to continue to rebalance and de-lever, driving global growth although its own GDP growth would slow toward 6%. • Europe was forecast to see steady growth at around 1½%, albeit with the clouds of Brexit and the Italian budget overhead. • BUT, financial markets did not cooperate. Has market volatility and the policy response changed the story?
3. Market Turbulence of Q4 2018 Is Over For Now Private & Confidential 3 0 50 100 150 60 80 100 120 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Selected Risk Indicators (End-Q2 2018 = 100) S&P 500 BAML Hi Yield Spread (inverted) VIX (inverted) Sources: FRED, S&P Global Economics.
4. December 2018 Our Quarterly Global Credit Conditions Narrative Private & Confidential 4
5. 2019 Baseline Macroeconomic Outlook Healthy and Necessary Slowdown, not GFC 2.0 Private & Confidential 5 • (From our December 2018 Credit Conditions Committee.) • Global growth will slow almost everywhere from a 6-year high of 3.8% in 2018 to 3.6% in 2019. • U.S. and China, the two largest economies (both now growing too quickly) will lead the way. • The risks are on the downside. 0 1 2 3 4 5 6 7 World U.S. Eurozone China Japan GDP Growth Forecasts December 2018 Credit Conditions 2017 2018 (F) 2019 (F) Sources: S&P Global Economics, Oxford Economics.
6. Global Macro Risk #1 (from December CCC): An Escalation Of The US-China “Trade War” Private & Confidential 6 • This is not only about trade and never was; it’s about the totality of the US-China relationship. • Direct tariff damage is minimal; spillovers to confidence, spending and growth are potentially larger. • US messaging remains uneven but there’s an increasing focus on tech and investment. • Solution: Restart the Bush II-era Strategic Economic Dialogue? -2.00 -1.50 -1.00 -0.50 0.00 2019 2020 2021 2019 2020 2021 US China US-China Trade War Effects Cumulative Deviation from Baseline in % of GDP Tariffs Confidence Sources: S&P Global Economics, Oxford Economics.
7. Global Risk #2 (from December CCC): Market Dislocation As US Rates Normalize Private & Confidential 7 Rising US rates are not the risk; the Fed moving toward a more normal stance is welcome. Divergence between Fed moves and what is priced in can cause sharp repricing/reallocation. December 2018 CCC round notes risk of higher debt service and access to financing. Fed is starting to “walk back” its language on 2019 hikes. Fed Dots vs. Market Pricing
8. Markets Have Had Other Ideas! Private & Confidential 8
9. Now: Market View of the Fed Shifted To Cuts Private & Confidential 9 The markets are now pricing in no rate hikes in 2019, and cuts in 2020. S&P Global thinks the Fed is on pause in H1.
10. Central Banks Worldwide Have Eased and/or Signaled They Are Easing/Leaning Lower Private & Confidential 10 • European Central Bank: Signaled that lift-off from zero rates could be postponed if the outlook deteriorates further. • People’s Bank of China. Lowered the required reserve ratio of banks to increase the amount of unencumbered assets and boost liquidity. Purchased perpetual bonds from banks to boost their capital and incentivize lending: this was not a form of QE! • Reserve Bank of Australia. Lowered its GDP growth forecast, and noted that the next move in the cash rate could be down. • Reserve Bank of India. Cut its policy rate by 25bps in January and changed its stance to neutral from calibrated tightening.
11. What Are The Data Telling Us? (line charts, G20 heat maps) Private & Confidential 11
12. Price Inflation Has Peaked Almost Everywhere Private & Confidential 12 CPI inflation is falling outside of Argentina, Turkey with DM back to trend. Source: National Statistics Bureau, IMF, Bloomberg. Data through January 2019. Note: Sample selected to calculate Z-score: 2010 Jan – 2019 Jan. Source: National Statistics Bureau, IMF, Bloomberg. Data through January 2019. -1 0 1 2 3 4 5 6 7 8 9 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Percent Change from Year Ago CPI Inflation (Country group weighted by PPP based GDP share) US China G20-DM ex. U.S. G20-EM ex. China
13. Trade Is Slowing Sharply, Both Exports, Imports Private & Confidential 13 Export growth declined sharply, with only commodity producers spared. Note: Saudi Arabia is excluded due to data limitations. Source: National Statistics Bureau, IMF, Bloomberg. Data through January 2019. Note: Saudi Arabia is excluded due to data limitations. Sample selected to calculate Z-score: 2010 Jan – 2019 Jan. Source: National Statistics Bureau, IMF, Bloomberg. Data through January 2019. -30 -20 -10 0 10 20 30 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 Percent Change from Year Ago, 3mma Exports Growth (Country group weighted by PPP based GDP share) US China G20-DM ex. U.S. G20-EM ex. China
14. Manufacturing PMIs Generally OK Private & Confidential 14 But much softer in core Europe and Korea. Source: Markit. Data through February 2019. Note: Argentina, South Africa and Saudi Arabia are excluded due to data limitations. Source: Markit. Data through February 2019. 46 48 50 52 54 56 58 60 62 Manufacturing PMIs US Eurozone China
15. Non-Manufacturing PMI Private & Confidential 15 Services PMIs look steady in absolute as well as relative to manufacturing. Source: Markit. Data through February 2019. Note: Canada, South Korea, Argentina, Indonesia, South Africa, Turkey and Saudi Arabia are excluded due to data limitations. Source: Markit. Data through February 2019. 48 50 52 54 56 58 60 Non-Manufacturing PMIs US Eurozone China
16. Retail Sales Relatively OK In Developed G20 Private & Confidential 16 Softer generally, especially in EM. Eurozone retail sales growth looks relatively steady. Source: National Statistics Bureau, Bloomberg. Data through December 2018. Note: India and Saudi Arabia are excluded due to data limitations. Sample selected to calculate Z-score: 2010 Jan - 2018 Dec. Source: National Statistics Bureau, IMF, Bloomberg. Data through December 2018. 8 10 12 14 16 18 20 -4 -2 0 2 4 6 8 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Percent Change from Year Ago, 3mma Percent Change from Year Ago, 3mma Retail Sales Growth U.S. Eurozone China (RHS)
17. Industrial Production Weakening Across G20 Private & Confidential 17 IP growth is rolling over globally, with few exceptions; U.S. growth far outpaces EZ. Note: Series as quarterly averages. Source: National Statistics Bureau, Bloomberg. Data through December 2018. Note: Saudi Arabia is excluded due to data limitations. Sample selected to calculate Z-score: 2010 Jan - 2018 Dec. Series as quarterly averages. Source: National Statistics Bureau, IMF, Bloomberg. Data through December 2018. 5 7 9 11 13 15 17 19 21 -6 -4 -2 0 2 4 6 8 10 Q1 2010 Q4 2010 Q3 2011 Q2 2012 Q1 2013 Q4 2013 Q3 2014 Q2 2015 Q1 2016 Q4 2016 Q3 2017 Q2 2018 Percent Change from Year Ago Percent Change from Year Ago Industrial Production US Eurozone China (RHS)
18. Japan: Decent Growth But “Nominal Challenge” Remains Private & Confidential 18
19. Regional Trade Slowdown Has Affected Japan Starting In Late 2018 To change, turn on or off footer: Inset > Header & Footer > Enter / change text > Click Apply All. 19 Source: CEIC -15 -10 -5 0 5 10 15 20 25 -15 -10 -5 0 5 10 15 20 25 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 USD bn % year on year Trade Balance (RHS) Exports (LHS) Imports (LHS)
20. 2018 Q4 Growth Was Still Strong Supported By Investment (NX Contribution < 0) To change, turn on or off footer: Inset > Header & Footer > Enter / change text > Click Apply All. 20 Source: CEIC and S&P Global Economics -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 % Expenditure Contribution to Q/Q SA Growth PCE GCE Net Exports Investment GDP q/q sa
21. Labor Markets Remain Tight With Unemployment Low And Wages Rising To change, turn on or off footer: Inset > Header & Footer > Enter / change text > Click Apply All. 21 Source: Ministry of Health, Labour and Welfare -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 % y/y, 3mma Nominal Wages Real Wages
22. Tankan Survey Holding Up GDP Y/Y Growth Modest Owing To Base Effects To change, turn on or off footer: Inset > Header & Footer > Enter / change text > Click Apply All. 22 Source: Bank of Japan and CEIC 0.0 0.5 1.0 1.5 2.0 2.5 0 2 4 6 8 10 12 14 16 18 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 % y/y Level Tankan Survey (All Enterprises) Real GDP (RHS)
23. Japan Does Not Have Labor Productivity Issue Output/Hour Above Advanced Country Average To change, turn on or off footer: Inset > Header & Footer > Enter / change text > Click Apply All. 23 Source: Conference Board and S&P Global Economics. Note: Ranges denote the 25-75%, 10-90%, and 5-95% quantile ranges for a sample of 28 advanced economies.
24. Bank of Japan Challenge: Inflation Remains Persistently Below Target To change, turn on or off footer: Inset > Header & Footer > Enter / change text > Click Apply All. 24 Source: CEIC 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 % y/y Headline CPI CPI Excl Fresh Food CPI Excl Fresh Food and Energy
25. Bank Of Japan Has Slowed JGB Purchases And 10 Year JCG Yields Are Negative Again To change, turn on or off footer: Inset > Header & Footer > Enter / change text > Click Apply All. 25 Source: Bank of Japan and S&P Global Economics -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 -18 -12 -6 0 6 12 18 24 30 % JPY trillion Change In BOJ Bond Holdings (Past Quarter) 10 Year JGB Yield (RHS)
26. Recession or Not: The Usual Suspects: Are Not Guilty! Private & Confidential 26
27. Economic Expansions Do Not Die of Old Age Private & Confidential 27 • Economic expansions are not people, whose probability of dying rises with age. • Research by the San Francisco Fed shows that the probability of an expansion “dying” within the next month is almost flat, at least in the post-WW2 era. • This reflects the rising share of services in GDP as well as countercyclical gov’t policy. Source: Federal Reserve Bank of San Francisco.
28. Suspect #1. Real Fed Funds Rate: Punch Bowl Barely Positive, and Low Even for Bearish r* Private & Confidential 28 -4.0 -2.0 0.0 2.0 4.0 6.0 Real Effective Federal Funds Rate Real Effective Federal Funds Rate S&P Forecasts r* Note: Real federal funds rate calculated using PCE inflation rate before December 2018, using 2% Fed's inflation target for the years after. Sources: BEA, Board of Governors and S&P Calculations. %
29. Suspect #2. Financial Cycle Shows A Neutral Picture Private & Confidential 29 Based on real credit metrics and real house prices.
30. Suspect #3. Oil Price Shock (for completeness) Not Happening Private & Confidential 30 0 20 40 60 80 100 120 140 1974Q1 1978Q1 1982Q1 1986Q1 1990Q1 1994Q1 1998Q1 2002Q1 2006Q1 2010Q1 2014Q1 2018Q1 Quarterly Imported Crude Oil Price dollars per barrel Nominal Price Real Price (Jan 2019 $) EIA Short-Term Energy Outlook, January 2019 Forecast
31. So What’s The Narrative Now? Private & Confidential 31
32. The Markets vs The Economists: Who is Right? Some Concluding Thoughts Private & Confidential 32 1. The economists narrative of slower, necessary and healthy global growth has been stress tested by the market turbulence of late 2018/early 2019, and the response of policy makers. 2. As of Q1 2019, for the macro view we see somewhat slower global growth (driven mainly by Europe) and somewhat higher downside risks, and central banks on hold; but not a material change to the outlook. 3. Markets see much slower growth or even a recession, plus a change in central bank behavior. 4. Who is right? If we do see a sharp slowdown, then the culprit would not be one of the usual suspects. Is there another one?
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