The damage is done.
That’s the message from the 57 fund managers who participated in BofA’s latest rates and FX sentiment survey, conducted from October 4 through October 9. Respondents came from the US, the UK, Europe and Asia and together control more than $800 billion in AUM.
Asked to choose from a variety of statements regarding the prospects for the flagging global economy, respondents overwhelmingly chose “The global uncertainty shock has been so persistent that lasting damage has been done and policy action will be too little, too late”.
Given that economic expectations have a rather pernicious habit of becoming self-fulfilling, these types of survey results are disconcerting, albeit wholly consistent with the consensus view that even if the US and China managed to come to an agreement that forestalls further escalations, the 15-month plunge into protectionism and Donald Trump’s efforts to roll back decades of progress on globalization have already done lasting damage.
In keeping with the above, participants in BofA’s survey cited “a fundamental reassessment of global growth and inflation prospects” when asked what’s likely behind the plunge in bond yields in 2019.
This rather dour assessment is in keeping with the data, which shows that resiliency in the US notwithstanding, the global economy continues to decelerate along with global trade.
In their July update, the IMF slashed its outlook for global growth for the fourth time in nine months. The fund sees the global economy expanding 3.2% in 2019, down from 3.3% in April and 3.5% in January. The outlook for 2020 was cut to 3.5% from 3.6% three months previous.
Similarly, the OECD recently cut their forecast for growth. In a September update, the organization said the global economy will expand just 2.9% this year and 3% in 2020. Those are the weakest annual growth rates since the crisis.
“Escalating trade conflicts are taking an increasing toll on confidence and investment, adding to policy uncertainty, aggravating risks in financial markets and endangering already weak growth prospects worldwide”, the OECD warned.
Friday’s “phase one” trade “deal” between the Trump White House and Chinese Vice Premier Liu He, along with Brexit optimism, is set to test the mettle of the bond rally in the week ahead, but no matter what happens over the next few months, it’s going to take more than a nebulous verbal agreement between the US and China and an averted worst-case scenario in the UK to shake the long-term resolve of the deflation camp.
At this juncture, just about the only thing that can change the game overnight would be a concerted fiscal stimulus push from Germany, China or, ideally, both.