A synchronized response to a synchronized problem

Thought of the day

by Chief Investment Office 15 Feb 2019

US retail sales fell 1.2% m-o-m in December, far worse than expectations for a 0.1% m-o-m rise, and the sharpest drop since September 2009. The control group reading, which is an input into the GDP accounts, also suffered its biggest monthly decline since January 2000, dropping 1.7% compared with expectations for a 0.4% increase.

Investors shouldn't read too much into a single month’s figures and the data could have been squeezed by the US government shutdown and may be subject to revision. But other recent data releases confirm a picture of slowing global growth:

  • Recent momentum in the Eurozone has been especially weak. Industrial production has been on a declining trend for the lpast year and has now fallen to lower levels than seen in the Eurozone crisis. And Germany just barely avoided a technical recession in 4Q18 with a GDP growth rate of 0%.
  • China PPI data, released on Friday, pointed to weakening domestic demand. PPI inflation has eased for seven consecutive months and at 0.1% y-o-y in January, it is 4.6ppts below the 2018 peak of 4.7%.
  • Citigroup's global economic surprise index has now been below zero for 315 days, the longest stretch in which data-misses have outnumber beats since 2008–09. It is also the second-worst run in the 16-year history of the index.Signs of a synchronized slowdown are being matched by a synchronized response from the world’s major central banks. The Federal Reserve has adopted a neutral data dependent stance. The hawks at the European Central Bank have taken notice, with Klaas Knot this week adopting a “wait and see attitude,” on removing monetary accommodation and Jens Weidmann claiming the current weakness is “a bit more protracted” than initially thought. And Chinese credit growth data suggest that monetary policy easing by the People’s Bank of China may be starting to gain traction. Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, picked up to 10.4% y-o-y in January from a record low of 9.8% in December. Against this backdrop we maintain a cautious risk-on stance, with a modest overweight in global equities backed by hedging strategies to help navigate market volatility.

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