Market hopes remain high, with fears around a U.S. recession receding. Immediate future hurdles may include the U.S. Q1 earnings season. Low inflation, Brexit and the lack of European structural reforms create longer-term concerns.
1. Markets look likely to look through a possibly slight slowdown in Chinese Q1 growth, but will focus on U.S. Q1 earnings.
Market hopes have been sustained by decent U.S. jobs data, which has reduced fears around a future recession and has also (through evidence of reduced wages growth) helped justify the Fed’s more dovish approach (page 2). The next data hurdle may be the Chinese Q1 GDP data, to be published next Wednesday. We think that there could be a further slight slowdown in reported growth from the 6.4% achieved in Q4 of 2018, but think that the markets will look through this, taking hope both from increases in infrastructure spending and also tax reductions, and also the prospect of a U.S. trade agreement. But, increasingly, the markets may focus on the evolving U.S. Q1 earnings season, now underway: as we discuss on page 6, some slowdown is likely here.
2. Low levels of core inflation continue to perplex many central banks, but are not an immediate hurdle to further market gains.
So what are the other potential hurdles to a continued recovery? Some of these seem primarily economic; others more geopolitical. At a narrow economic level, central banks are still struggling to react to persistently low inflation. Headline U.S. consumer price inflation (CPI) rose in March, as reported this week, but core U.S. CPI fell to a 13-month low and recent Eurozone inflation data has also been downbeat. In China, higher food prices have pushed up headline CPI but core inflation has remained unchanged and producer price inflation seems stuck at persistently low levels. When inflation will return to more “normal” levels – and whether we should welcome this remain unanswered questions.
3. In Europe, a further Brexit delay has removed one immediate market threat for now – but resolves nothing.
Europe clearly features a mixture of both economic and geopolitical concerns. As we discuss on page 4, continued weak growth indicators in the Eurozone have prompted the ECB yet again to point the finger at a lack of structural reform in member states. This issue seems likely to stay in the spotlight as the ECB does not have the ability to shift growth to a higher level by reducing interest rates. More immediate concerns still include Brexit. The EU27’s decision to (again) extend the departure date to October 31 is clearly to be preferred to a hard Brexit scenario. But it does not, in itself, resolve anything and may create both UK domestic political risks (e.g. new elections) and also some risks for the EU. Our central scenario a negotiated exit, but many scenarios remain possible.
We wish all our readers a very happy Easter weekend. The next edition of this CIO Insights Bulletin will be published on Friday, April 26, 2019.
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