Are we really there yet ... ?
Global stocks and bond yields slumped at the end of the week. Investor fears about the health of the world economy deepened. News of a continued manufacturing slump in Europe added to the gloom as investors tried to make sense of the US yield curve.
The Fed made it clear there would be no rate rise in 2019. Ten year bond yields fell to 2.4%. The yield curve is inverting. What is it saying about recession? Not much. More a cry for help than a warning of recession, the chatter is confused by Fed action along the bond timeline. Not waving but drowning, the yield curve is trying to make sense of an possible return to Planet ZIRP.
Talk of a US rate cut this year doesn't make much sense. The Fed has cut the forecast for growth this year to 2.1%. from 2.3% in December. This is a virtual mathematical improbability. We expect growth in the first quarter to be in line with the final quarter of 2018. The US economy will continue to benefit from Trump tax cuts and Trump expenditure plans. The government deficit was a record $234 billion in February. Government debt is now $21.4 trillion dollars. The day of reckoning will arrive for the U.S. economy but not just yet.
We expect markets to rally, bond yields to rise and the Fed to move before the end of the year.
Taking Back Control ...
With just one week to go to the departure date, an extension to the deadline has been secured for a troubled Prime Minister. The EU is taking back control of the process. Progress must be made in the House, if the deadline is to be extended beyond a revised April short date.
Those concerned about recession in the UK should look no further than data releases this week. Latest jobs data continues to demonstrate the strength of the domestic economy. The number of people out of work was 1.3 million. The unemployment rate fell to 3.9%. The lowest since 1974. The employment rate was over 76%. It has never been so high. The number of vacancies in the economy was over 850,000. Earnings are increasing, rising to 3.7% in January. Pay in the construction and financial services sector increased by 4.5%.
Real incomes are rising. The latest inflation data for February marks CPI inflation at 1.9%. Government borrowing is falling. In the financial year to February 2019, borrowing was just £23.1 billion. The lowest level since 2002. Total UK debt peaked at £1.8 trillion in December.
Retail sales in February were up by 4% in volume and 4.3% in value. Online sales increased by over 9% accounting for just under 20% of all retail sales.
Despite the strength of domestic demand, the Bank of England MPC voted to keep rates on hold this week. The bank is worried about the impact of a shock exit from the EU. This week, the CBI and the TUC sent a joint letter to government urging a positive solution to negotiations warning of a national emergency. "We cannot overstate the gravity of this crisis for firms and working people", they said.
Fed Holds Back ...
Central banks in the U.S., U.K and Europe are holding back. Growth forecasts are being cut as fears of trade wars and a slowdown in China abound.
China is the second largest economy in the world valued at $13.5 trillion dollars in 2018. The U.S economy is worth some $20 trillion in comparison. A growth slowdown in China this year will still add some $800 billion to the world economy. Marginally lower growth from a higher base. That's roughly the same amount as in 2018. Of itself lower growth in China is not a threat to the world economy.
Trump's tariffs are a real threat to the world economy and the US economy for that matter. Yesterday the President decided to block planned sanctions on North Korea. The move was announced on Twitter, catching senior officials in his own administration by surprise. White House press secretary Sarah Sanders said "Mr Trump likes Chairman Kim and he doesn't think these sanctions will be necessary". If only he liked Chairman Xi as much, then we could all breathe a sigh of relief.
Markets fearing a recession are misguided. The differentiation should be made between cyclical change and structural change. For example, the UK will experience strong retail sales growth in the first quarter.The carnage in the high street continues, Debenhams, the latest casualty. Shareholders face extinction from a debt reconstruction now imminent. The changes in retail are structural not cyclical. The impact of online sales has reached the tipping point challenging the retail bricks and mortar model.
We traditionally think of the car market as a short lead indicator of recession. It is structural not cyclical changes impacting on total sales in the U.S. China, Europe and the UK. Diesel sales are falling as the rise in alternative fuel models continues. Capacity constraints in AFV will impact on top line sales numbers.
Fears of recession are haunting stocks, pushing bond prices higher. Central banks are falling further behind the rate curve. When markets move, up or down, someone somewhere is making money. Traders love volatility. Recession, are we nearly there yet? Of course not ...
That's all for this week, have a great week-end. We will be back with more news and updates next week!
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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