Early Saturday, we sketched the contours of a cautious outlook on the US economy and a matching bullish take on US Treasurys advanced by SocGen’s Subadra Rajappa.
In keeping with the bank’s forecast for a mild US recession next year, she sees the 10-year at 1.20% in Q4 2020, and projects the Fed will deliver 100bps of rate cuts in the first half of next year as signs of economic deceleration and, ultimately, a downturn materialize.
To be clear, that is an out-of-consensus view, but when you consider the fact that 10-year yields were below 1.50% just a few months ago and that SocGen’s call on the US economy is not for a dramatic downturn, but rather for a mild, two-quarter contraction, it’s hardly far-fetched.
In fact, a quick look at BNP’s forecast for 2020 reveals a broadly similar take, although they’re a bit more optimistic.
“We continue to see a ‘soft landing’ with weak growth persisting into H1 2020”, the bank writes, in the US section of their year-ahead global outlook. “Central to this view is our expectation that though US consumer and labour markets should remain resilient, they will not be unscathed by the weakness in business investment and manufacturing arising from tepid ex-US global growth and uncertainty around trade policy, deglobalisation and populism”, they add.
As regular readers know, we have continually warned that the pernicious trend away from multilateralism, the rising tide of nationalism and the creeping tendency for politics in western democracies to exhibit an inward-looking bent, are deleterious to growth and prosperity.
We’ve been pounding the table on that for three straight years, and we’ve been right. Global growth is on track to be the weakest since the crisis this year, and that’s in no small part due to the fallout from the protectionist tendencies that are part and parcel of populist politics.
(IMF forecasts in yellow)
Of course, the US was insulated from the turmoil abroad by the fiscal stimulus sugar high in 2018, but that waned in 2019 and growth has, in fact, decelerated stateside. Things seem to have inflected for the better over the last two months after the late-summer swoon, but there are no guarantees that things won’t tip again in 2020.
“In 2015–16, a similar shock from external conditions, manufacturing and fixed investment (though milder if excluding the oil sector) ultimately saw US domestic demand slow more than our current moderate forecast portends”, BNP goes on to say, in the same piece cited above.
The bank also flags the distinct possibility that between ongoing trade uncertainty and election risk, business investment “might remain subdued”. Obviously, plunging CEO confidence is a big story these days. At the heart of the dive in C-suite sentiment are trade jitters and election risk.
As far as the “Phase One” deal between the US and China goes, BNP calls that “likely”, but worries that “recent market exuberance is excessive”. Besides, the bank reminds you that “the outlook [is] cloudy for the phase-2 deal that would be far more critical for resolving bilateral tensions”.
“Cloudy” is a really nice word for the outlook around the “Phase Two” discussions. If you wanted to, you could simply say there will never be a “Phase Two”, something Chinese officials suggested in comments to Reuters late last month.
As you can see from the above, BNP’s forecast for US growth in 2020 is just 1.5%. While that’s higher than SocGen’s projection, it’s still below consensus and it helps explain why the bank sees the Fed cutting rates by 50bps in the first half of the year. To wit:
We believe the slowdown in consumption and labour markets should be enough for the Fed to make a “material reassessment” and cut rates in H1 2020. The circular dynamic between Fed policy and market expectations seen earlier this year might also return. Our forecasts assume that renewed market concerns over household spending, job creation and trade tensions will force the Fed’s hand again next year. We expect a 25bp cut in both March and April 2020 on likely weak Q1 data.
Again, that’s in keeping with SocGen’s take, although not quite as bearish (i.e., SocGen expects a deeper growth slump and thus double the total Fed easing to counteract the slowdown).
Our readers tend to harbor a skeptical view of any outlook that seemingly emanates from someone wearing “rose-colored glasses”, so we imagine BNP’s more cautious take will resonate.
And yet, this comes with the usual caveat: The trick is disentangling a justifiably circumspect view of an economy facing myriad external risk factors from asset prices which benefit from the kind of monetary policy lean that’s likely to accompany any slowdown.
More simply: Anyone betting against central banks’ ability to suppress volatility and levitate financial asset prices despite (and, indeed, because of) an extremely fraught geopolitical backdrop, hasn’t had an easy go of it in the post-crisis years, that’s for sure.