The Most Dramatic Pivot Since The Crisis

And the story may not be over yet.

That’s from Goldman, whose Jan Hatzius warns that despite the Osaka trade truce, the drag on the global economy from the ongoing, multi-sided trade conflict may not abate in the near-term, and to the extent it continues, will likely weigh disproportionately on surplus countries and emerging markets.

Overnight Friday, China ratcheted up the rhetoric around FedEx, which Beijing continues to insist is involved in a conspiracy against Huawei. The allegations (which include charges that FedEx held onto at least 100 Huawei-related shipments) underscore the challenges the US delegation faces in getting talks back on track next week.

That’s hardly the only trade headwind. The US and Europe haven’t even begun negotiations in earnest.

“Although US-China trade talks have resumed, the latest pause in tariff escalation looks likely to be temporary, and we still see a slightly greater than even chance of further tariffs on imports from China before a limited agreement is reached late this year or in early 2020”, Goldman cautioned, in the same Thursday note mentioned above. “If this portends further weakness in global trade, surplus economies such as Germany (and the Euro area more broadly) might continue to struggle”.

And so, cue the epochal central bank pivot in the interest of protecting the downside at a time when global growth is running at a below-trend 2¾%, a fairly steep decline from roughly 4% a year ago. Have a look at the following chart which, while not “new”, is another helpful visualization when it comes to conceptualizing just how dramatic the pivot has been.


This is the most dramatic pivot since the eurozone debt crisis. Indeed, it looks more like a mini-version of the GFC in terms of policymaker reaction.

While Goldman notes that the US economy is still in “decent shape” amid a still tight labor market, close-to-target inflation and growth running a shade above 2% both this year and next (on the bank’s estimates anyway), SocGen reminds you that the degree of monetary tightening stateside should be measured from the lows in the shadow rate. “Though the current Fed policy rate of 2.5% is significantly lower by historical standards at a rate peak, counting the impacts of the QE-unwind since 2014, the degree of tightening has been severe”, the bank wrote Thursday.


This is a familiar refrain from SocGen.

Read more: One Bank Reminds You ‘What Makes This Fed Tightening Cycle Special’

“Often coinciding with yield-curve inversions, peak tightening is the most credible indicator of upcoming economic slowdowns, heralding the end of a late-cycle that supports aggressive growth strategies and the need to rotate instead to defensives across the board”, the bank went on to write. As you can see from the chart, the 3m-10y spread bottoms around peak tightening, almost by definition.

Still, Goldman sees no immediate cause for alarm in the US beyond July and September. “We are modestly above consensus because we expect the negative inventory cycle to end and final demand to continue growing robustly on the back of easier financial conditions”, Hatzius says. “This should limit Fed easing to two 25bp insurance cuts, one next week and another in September”.


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