The worst may be over for the world economy’s slowdown.
A wave of interest-rate cuts by central banks including the Fed and mounting expectations of a US-China trade deal are buoying confidence in financial markets just as Key economic indicators show signs of stabilization after recent declines.
While a robust rebound may not be here yet, the relative improvement could put an end to the fears of just a few weeks ago that the world economy was headed to recession. Such an environment might to be enough for Fed Chairman Powell and fellow monetary policy makers to pause from doling out monetary stimulus.
“We do see multiple reasons for a stabilization in global growth in 2020 versus 2019,” said chief economist for Standard Chartered Plc in Singapore, who shares the International Monetary Fund’s expectation that global growth will accelerate next year.
Among the reasons for confidence: While JPMorgan Chase & Co.’s global manufacturing index contracted for a 6th month in October, it inched closer toward positive territory as both output and orders firmed.
The Institute for Supply Management’s (ISM) gauge of factory activity stabilized in October while the government’s jobs report on Friday showed payroll gains exceeded forecasts and hiring in the previous two months was revised much higher. The ISM’s gauge of services is also showing signs of improvement.
In Europe, there are also tentative signs of health after it was squeezed by the trade dispute as well as BREXIT.
The euro-area economy expanded more than forecast in Q-3 and while Germany may already be in recession, the Ifo Institute reported that expectations among its manufacturers edged up in October.
As for Asia, inventories of semiconductors in SKorea fell the most in more than 2 years in September in a sign a slump in global technology is ending.
Financial markets are tuning into the optimism.
US stock benchmarks marked to all-time highs this week and the yield on the 10-year T-Note rose. European and Asian stocks have also advanced.
“I just look at the fiscal/monetary mix, it’s the most stimulative that I think I’ve ever seen,” said hedge fund manager Paul Tudor Jones Tuesday. “It’s no wonder that the stock market’s hitting new highs. It’s literally the most conducive environment, certainly in the short run, for economic growth and strength that I’ve ever seen.”
A Key reason for the potential turn is the wave of interest-rate cuts from global central banks. Of the 57 institutions monitored more than 50% cut borrowing costs this year with the Fed doing so 3X and the European Central Bank pushing its deposit rate further into negative territory. Rate cuts also operate with a lag so the positive effects of easier monetary policy have yet to fully flow through, meaning a further result likely awaits.
Chairman Powell last week hinted the Fed may be done reducing borrowing costs as he said the stance of policy was now “appropriate” to keep the economy growing moderately. “It would take a material change in the outlook for me to think that further accommodation would be required,” Fed Bank of San Francisco President Mary Daly said Monday.
Also driving sentiment is that President Trump and President Xi are on the cusp of signing “Phase 1” on a trade deal, which could be enough for global commerce to find a footing. China is reviewing locations in the US where Xi would be willing to meet with Trump to sign a pact.
US Commerce Secretary Wilbur Ross said Washington has also enjoyed “good conversations” with automakers in the European Union, raising hopes that The Trump Administration may not slap tariffs on imported automobiles this month.
Morgan Stanley economists reckon the contraction in global trade volumes likely narrowed in October, declining 0.6% compared to 1.3% in September. Retail, auto and semiconductor sales are all stabilizing, it said in a report this week.
Elsewhere in Europe, the risks of a so-called no-deal BREXIT have also diminished after the EU extended the deadline on the UK’s departure until the end of January and PM Boris Johnson called a December election in the hopes of breaking the impasse between politicians.
In May, similar hopes were building, only for President Trump to ramp up tensions with China. While Washington and Beijing have signaled they are getting closer to agreeing on the 1st phase of a deal, it is not clear whether trade talks would continue toward a comprehensive agreement.
“If the US-Chinese trade escalates again, or if the U.S. starts a new trade war against the only other economy of almost equal size, the EU, it could all still go wrong,” said the chief economist at Berenberg Bank. “But in the absence of such new political shocks, chances are that the global downturn could peter out in early 2020 and make way for a modest upturn thereafter.”
The strength of any revival may ultimately depend on the health of China’s economy, which expanded in Q-3 at its weakest pace in decades and where evidence of a bottoming out in demand remains tentative
A gauge of Chinese manufacturing dropped this month to the lowest level since February while a measure of new export orders contracted at a faster pace. At the same time, construction, real estate, consumption and services are holding up, buoying expectations that officials are managing a gradual slowdown.
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