Good news. The global economy may be “bottoming”.
Or so says Goldman’s Jan Hatzius in a note dated Tuesday.
The “synchronous global slowdown” story had dogged markets for the better part of six months now, even as the policy response to that narrative helped catalyze the best start to a year for equities since 1987.
The idea of a global slowdown marks a stark contrast to the “synchronous global growth” narrative that served as one of two pillars which supported the low vol. regime in 2017 (the other being “well-anchored inflation”). The irony is that the “well-anchored inflation” pillar was what ensured developed market monetary policy would remain some semblance of accommodative. Now, expectations of accommodation from DM policymakers are predicated on the crumbling of the growth pillar.
In any case, the idea that the YTD rally and the “reflation” theme are best thought of as “rentable” (as opposed to sustainable) stems from the suspicion that we are in fact late cycle and that the best efforts of monetary policy notwithstanding, a slowdown is all but inevitable. Evidence of that slowdown is most pronounced in Europe and China.
In the Tuesday note mentioned above, Goldman’s Hatzius writes that the bank’s current activity indicator “stands at 3.0% for February so far, slightly above the downwardly revised December/January numbers.”
“The risk to our bottom-up global GDP forecast of 3.5% for 2019 as a whole is probably still on the downside”, Hatzius concedes, but notes that “some green shoots are emerging that suggest that sequential growth will pick up from here.”
It goes without saying that the case for a pickup is the strongest in the US. On that, Goldman cites loosening financial conditions in the new year. “The path of financial conditions over the past several months suggests that the associated growth drag should be at its worst point in Q4/Q1 and diminish thereafter”, Hatzius says, on the way to contending “that growth is likely to pick back up to a modestly above-trend pace in the remainder of the year.”
On China, Goldman rehashes the “stabilizing at a low level” story that’s served as the go-to narrative for optimists since Q4.
Of course getting a read on where things stand economically in China based on January data is inherently difficult due to holiday distortions, but there’s no doubt that Beijing is keen on engineering a turnaround both for equities (narrowly) and the economy (more generally). Here’s Hatzius:
… the recent set of indicators looks more encouraging than the relentlessly negative news of prior months. Moreover, policy has shifted to a more expansionary stance, consistent with the rebound in the latest money and credit figures, and trade negotiations with the US seem to have taken a more positive turn, at least for the time being. We therefore continue to expect our China CAI to stay in a 5%-6% range, with a modestly rising trend as we move through 2019.
On Europe, the outlook is still pretty dour. Goldman reiterates the obvious, which is that Italy is in a recession and Germany barely skirted a similar fate in Q4. Recent kitchen-sink cuts to the outlook from the EC only underscore the apparent malaise. Hatzius notes that the bank has pushed out their expected date for the first ECB hike to mid-2020 from late this year.
As far as political headwinds, Goldman acknowledges that they are still “significant”, even if things have improved at the margin. After noting progress on the trade front, the bank includes the obligatory nod to the fact that “uncertainty around how the Brexit impasse will be resolved remains large.”
Ultimately, the bank is still upbeat on risk assets, still sees bond yields rising (BKEs are too low, they say), is still bearish on the dollar and remains “modestly bullish” on oil in the near-term, while holding on to a “more bearish outlook” in the latter part of the year.
Now, who’s excited after reading all of that?!