Economic Commentary – May 2019

May 14th, 2019, by Martyn Torevell

Slowdown, what slowdown?

Global equity markets and other risk assets continued to rise during April as fears of slowing global trade, protectionist policies and lacklustre inflation have been brushed aside by relatively positive economic and corporate data. All major global equity indices are showing healthy gains since the start of the year which has helped offset the impact of sharp falls towards the end of 2018. Measures taken by the US Federal Reserve (Fed) and other central banks have put further pressure on bond yields and, along with improving sentiment on the US-China trade talks, have led equity investors to take a more optimistic view of the future. This optimism may prove to be short lived, as President Trump’s more antagonistic approach to trade talks in early May has seen equity markets fall back from their recent highs.

Economic data has provided reassurance that the US Federal Reserve is unlikely to raise interest rates in the near future and have helped the Fed resist (so far) President Donald Trump’s calls for cuts. Our belief is that the President’s current pressure on the Federal Reserve is less to do with economic and financial prudence but more with an eye on his bid for a second term in office, with elections 18 months away. The Fed is still on course to withdraw some $200bn of liquidity from the market in September as it reduces the size of its balance sheet; however it might indicate halting this action prior to any potential interest cuts.

The first estimate of Q1 2019 US GDP growth was an unexpectedly high 3.2% (well above expectations of 2.0% and the 2.2% growth figure for Q4 last year) although growth in underlying domestic demand is not as robust. The quarter-on-quarter rise was helped by high inventories, improving trade and government spending, though both consumption and business fixed investments were weaker contributors to growth, signalling that this level of growth is unlikely to be sustained. With unemployment still low at 3.8%, inflation at 1.9% and wage growth of 3.3% it is a positive picture for the US consumer, but the lack of inflation continues to be a source of concern for the Fed.

The Brexit can has been kicked to a new 31 October deadline, releasing some of the immediate pressure in the UK, however with European elections looming in May and no sense that the negotiations between Conservative and Labour parties are yielding any new breakthrough, there is no end in sight. The likelihood of a ‘no deal’ Brexit is currently seen as a low probability and Sterling has held steady against US Dollar and Euro at 1.30 (USD to GBP) and 1.16 (Euro to GBP) respectively, over the month. The UK Manufacturing PMI survey came in at 53.1 in April, slightly down from the surprising 55.1 in March, but still constructive as business sentiment improved to a 7 month high. UK unemployment remained low at 3.9% whilst wages rose 3.4%, well above core inflation of 1.9%.

Within the Eurozone, manufacturing continues to disappoint, with Germany continuing to lead the downturn (in contrast Greece, expanded at the fastest rate in 19 years, albeit from a depressed base). In France, overall business confidence improved slightly in April, but manufacturing remained weak. In response to the ‘gilets jaunes’ protests President Macron announced a new round of reforms, most notably new tax cuts. Euro zone inflation remains low at 1.4% y/y, and tepid growth and poor confidence provided sufficient justification for the ECB governing council to leave interest unchanged at 0.0% at its April meeting.

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