Synchronized global growth heading into early 2018 has become more complicated. Global divergences are forming in growth and inflation. US Treasuries are not coming off the hinges just yet but an increased risk of (too) sharp of a rise in interest rates is clearly in the back of investors’ minds. China and Europe are decelerating somewhat but from elevated levels. The US is humming right along in economic performance but it may be on borrowed time as the personal saving rate plummets to decade lows and the government debt clock spins so fast it looks broken – but “nobody seems to notice, nobody seems to care”… until the economic tide turns and there is no ammo left to fight the next downturn without obliterating the dollar. This fact has not gone unnoticed by astute financial observers with a keen grasp of 8th-grade mathematics – and currency traders. Definitely currency traders have noticed.
North Korea is coming to the table with olive branches and geopolitical risks haven’t escalated overall recently in terms of financial market impact, yet the global economy remains sensitive to one lit match landing at the wrong place at the wrong time – Iran nuclear deal? Tough global trade negotiation techniques turning into real trade wars? There are notable risks now just as there have been throughout the entire 10-year historic everything bull market run. Assist FX continues to believe most scenarios are manageable other than a fierce rise in stubborn inflation that forces a moment of truth amongst the global central banking regime of Keynesian lever pullers. Let’s take a look at some of the recent macro indicators:
- OECD upgraded 2018 global growth forecast to 3.9% from 3.6%
- US CPI (Feb) is still running warm at an annual pace of 2.2%, core at 1.8%. There are reasons to believe this number will accelerate rather than decelerate given year over year compares coming down the pike soon at quasi-full unemployment (job quality is highly debatable but the trend is clear) and major headwinds to a lasting return of King Dollar – Kudlow or no Kudlow. The greenback can strengthen somewhat from here but we aren’t going to see its golden muscles flexing in the sun moment of early 2016 again without a wave of bankruptcies from drunken corporate sailers falling off what is left of Ms. Yellen’s easy money express.
- New York Fed Manufacturing Index (March) was firm at 22.50 vs. 15 exp., 13.10 previous.
- Philly Fed Manufacturing new orders component (March) registered 35.70 vs. 24.50. Solid leading indicator in the manufacturing sector.
- US Retail Sales (Feb) reading was terrible at -0.1% vs. 0.3% expected, -0.1% previous. All is not well for consumers pulling out shrinking dollars from their wallets to buy things according to hard data. Yet, consumer confidence is raging at decade highs. Consumers have never felt better about having less disposable income. Will the benefits of tax cuts outweigh the cost of higher interest rates and inflation? Perhaps.
- Eurozone CPI (Feb) is barely hanging on at 1.2% y/y and core at 1.0%. There are signs of further softness but in the real economic world softer prices commonly lead to stronger purchasing power and growth 1-2 quarters out. The inflation index upticks that get Keynesians excited with bogus demand side modeling projections are more likely to lead to market trouble than the downticks which help real human beings who buy things.
- Italy CPI (Feb) tanked at -0.5% m/m, 0.5% y/y.
- China rebar and other industrial materials are trading very heavy, making multi-month lows in several cases. China is tapping the brakes with a modest deleveraging but not slamming on them. But at what point will China’s deceleration cause trouble elsewhere?
Economic data points from the past couple of months are one thing. Bond yield dynamics with the power to impact nearly all markets going forward is another. Yield curves in developed markets such as the US and Germany have been flattening quite a bit in recent weeks. That relationship might continue or it might not. However, the US 3m Libor OIS spread has been fairly relentless no matter what happens in the data. This is significant. It indicates increased stress in the short-term lending market. If the Libor IOS spread keeps widening at an accelerated pace something will break. Until that point, it is something to watch closely at the very least.