In 2019, the US Federal Reserve has taken a dramatically dovish turn, most notably by acknowledging that “crosscurrents and conflicting signals” have caused them to take a “patient approach” towards any future interest rate changes. Markets were spooked late last year when Jerome Powell signalled several rate hikes were still to come, but now it appears they will delay any such move choosing to wait for signs in economic data.  They were also more dovish in their forecasts of inflation pressures and inflation expectations noting the risks as “roughly balanced,” and their rhetoric on balance sheet policy has been softer too, albeit without formally changing that policy. The markets have welcomed this change of heart.

Another positive step forward in the of defusing bilateral trade tensions that began with the Trump/Xi phone call back on 1 November, the US confirmed it would extend the 1 March deadline for raising tariffs on Chinese imports as promised by President Trump. The announcement is reminiscent of how the US administration handled the auto tariff issue last year: they agreed to defer penalties so talks could progress. The US has also discussed leaving existing tariffs in place to ensure China complies with any eventual deal. In any event, there are many possible outcomes to consider and investors must keep an open mind as developments take place in the coming weeks and months.

Recent trade data from China’s trading partners show a sharp slowdown, with weaker demand from China cited as the main reason. Indeed, Purchasing Managers Indices (PMIs), suggest that weakness in China may be more pronounced than the brief stabilisation in December’s economic activity data might suggest. Consumer spending data over the Lunar New Year and February inflation data were both weaker than expected heightening concern over corporate profitability, employment, consumption and the potential spill over effects.

Elsewhere, the Bank of England reduced its 2019 growth forecast from 1.7% to 1.2%.  This was weaker than expected and sends a clear message that a hike in interest rates in the coming months is increasingly unlikely. Prolonged Brexit uncertainty and weaker global growth will likely postpone any need for tightening until later in 2019. The European Commission also slashed its growth forecasts for all the euro region’s major economies – from Germany to Italy – and warned that Brexit and the slowdown in China threaten the global economic outlook. It shaved a whole percentage point off its 2019 projection for Italy, now forecasted to have a minimal expansion of just 0.2% for the year.

However, there are bright spots in the near term, including a more benign interest rate environment and continued, solid corporate profitability this year so far. Trends in both will continue to be watched closely as we approach the end of the first quarter of 2019.

 

Sources: JP Morgan, Factset Research Systems, Bloomberg

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