E Markets: Bad News Bears

This isn’t a feel-good movie day, but reality as the bad news bears return from a quick 2-week hibernation and the China trade data overnight remind investors that all isn’t well in the global economy. Convergence of the US and China growth rates is one factor, tariffs and talks another, internal weak demand from policy and demographics a third as the world remains mired in uncertainty. Politics continue to hinder confidence as well – with UK May and Brexit coming to a head tomorrow with the fragility of her government in play, with Greece PM Tsipras facing a vote of no-confidence Wednesday after the Greek Independent Party leaves his coalition government over the dispute what to call Macedonia. What you call someone matters. The usual top 10 names for new babies in the US track the 1% in the previous 20 years. Name someone for a rich movie star or sports hero and you have a story built in. Others use family names in honor of their history.  

The battle over what to call the present economic and market state seems to be more like two new expecting parents nervously waiting for the birth and fit for the name rather than some romantic comedy with fairy-tale like endings.  We are at the beginning of the show and 2019 has been filled with hope with a significant rebalancing from the December gloom. Overnight news beyond the China trade surplus rising thanks to imports collapsing wasn’t supportive for global growth either as Eurozone industrial production hits 3-year lows. What was interesting was the Swedish key inflation rate rising while pipeline rates in Germany fell as they did in India. The split between CPI and PPI data into 1Q will be important to watch to see if the oil price drops in 4Q help profit margins elsewhere. In the interim, the correlation of the global growth to rates to equities and to the USD is very much in play. How the USD trades today beyond the safe-havens of gold, JPY, CHF and bonds is important to measuring the risk-off, bad news is bad news return with central bankers not seen as movie stars able to win over public confidence and fix losing teams anymore. 

Question for the Day: Does oil matter more than rates for the USD? The correlation of energy prices to the USD was the focus of the Liberty Blog from the NY Fed last week. This is worth reading this week after the bounce back in oil prices last week, and given today’s pullback after the China trade weakness. Global correlations to oil and to China trade make the feel-good hopes for a US/China trade deal insufficient to reverse the present negative momentum in growth in the world. There will need to be more than a “pause” to US rate hikes and to the rest of the worlds push for normalization in rates. Fiscal stimulus from China will need to be more targeted as well with the financial inflows into China for bonds and stocks thanks to MSCI and Barclays adding them means a CNY that is too strong and not able to counter the imbalances elsewhere in the economy. The role of the USD in countering global pains is clear and it’s not going to go away in 2019. 

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