Markets are on gravity hill, a place where the layout of the road ahead produces optical illusions, so that a car in neutral appears to be rolling uphill against gravity. Without a horizon, it becomes difficult to judge the slope of a surface, as a reliable reference is missing. This is what we hear from the FOMC as global uncertainty overwhelms the present condition. We have been in this spot for most of 2019, where the global crush of 4Q pain has been ignored, where the patient Fed shift to neutral in January lifted risk markets back from the dark valleys of December 2018. But the horizon is shifting again and the car has stopped moving. The fear of US politics getting uglier as Mueller delivers his Russia report, of global growth reversing after German manufacturing PMI drops to 6½ year lows, Brexit confusions rise and as the US yield curve inverts 3M to 10Y – all that unwinds the risk rally that started after the January FOMC meeting.  Mix politics with economics, shake with an extended global rally extended by too much credit and you have the makings for a larger roll down the hill moment even with policy plans in neutral. 

The question many are asking is whether this policy is sufficient given the lack of progress in Europe or Asia in battling the same slowdown in growth. Can central banks turn on the engine and drive forward with the same tools as before, can you shift from backwards to forwards without neutral and a risk of a stall?

Larger fears about the BOJ and ECB being in a liquidity trap are on the rise just months after they both were talking about “normalization.” Behind this abrupt shift in outlook lies the US/China trade war, the restrictive policy of China as it fights credit bubbles in the shadow banking sector, the rising US budget deficit and doubts about the politics behind the tax reform that created it along with the pain of the government shutdown from December, the plans to end QE at the ECB, the UK Brexit with all its delays, the politics of Europe with yellow vests in France, a populist Italian coalition and a fractured Spanish government facing elections in the month ahead.

Against these headwinds, the US economy sees financial conditions as easy, employment continuing to grow, wages nudging higher, balance sheets of consumers better than in 2007, momentum for orders and confidence continue above average. The road ahead without the barometers of yield curves or the FX markets seems a bit lost. This puts models back into focus – whether they are monetary or modern.

Question for the Week Ahead: Is US divergence back? 

Or perhaps the more important related question – does it matter enough to prevent a global slowdown that risks further political and economic upheavals? The data last week and the reaction to the US FOMC meeting restarts views that US growth in 2019 may slow to 2.1% but remain over potential of 1.7-1.9% while that of Europe stalls at 0.9%-1.1% below 1.5% potential. The data focus was on PMI flash reports – all fell in March with the most notable being German manufacturing. The return of the French yellow vest movement as a concern was also notable.

The US focus was on the rebound in existing home sales (up 11.8% m/m to 5.51m SAAR)  and the relationship of lower US rates to mortgages and to buyers. As NAR economist Yun noted: "A powerful combination of lower mortgage rates, more inventory, rising income and higher consumer confidence is driving the sales rebound."  

There were other US positive data points last week. The forward looking Philadelphia Fed manufacturing index also rebounded to 13.7 from -4.1 but the six-month outlook slowed to 21.8 from 31.3. The report puts the focus on Dallas, Richmond and Kansas next week. The bounce will be watched against the recent weakness from December. The growing view is that US 1Q GDP will be 1% but bounce back to 2% in 2Q while Europe and Asia will remain in a dangerous stall speed trajectory.

The key question for the week ahead is one about confidence and how politics and central bankers play a role in moving markets back to stable after the reversal on Friday. The EU commission economic sentiment and US conference board and University of Michigan consumer sentiment reports will be watched accordingly. The drop in US rates is more troubling to stocks than usual given the safe-haven demand in other markets as well. This isn’t a US story but a global one where 2007 yield curve inversions recall the 2007 AUD/JPY reversals as well. 

Market Recap:

The reversal of mood last week was notable and important as European PMI flash reports (coupled with those of Australia, Japan and the US) put lower growth expectations pushing against the FOMC dovish tilt (11 of 17 see no more hikes in 2019) and the glow of ECB TLTRO III for risk. US politics also turned as a factor with the Mueller inquiry sent to the US attorney general as the dominant weekend news after NCAA basketball.

The drop in global yields gets US 10Y back to December 2017 levels and inverts the yield curve 3M-10Y for the first time since 2007. Brexit concerns rose as UK May gets an extension to April 12 to vote on a plan and May 22 if that plan is approved. BOE was on hold given uncertainty but the Norges Bank hiked rates 25bps to 1% and sounded hawkish battling against other more dovish opinions from all other central bankers this week. The data in Asia wrapped around Japan with machine orders at 4-month lows -2.9%, Japan exports and imports lower like those of Korea and Singapore. China markets held bid on government stimulus hope and US/China trade talks. In EM, India bounced with Modi re-election hopes. Brazil saw stock and BRL weakness on Temer being arrested countering the feel-good pension reform hopes. 

Equities:

The MSCI all-country World Index fell 0.56% to 505.88 on the week – touched 5.14.47 highs on Tuesday. In contrast, the MSCI EM index rose 0.22% to 1059.63 for the week with 1075.35 highs Thursday. 

• The US S&P500 fell 0.77% to 2,800.71 on the week – with highs Thursday at 2859.4 and lows at the close Friday.  The DJIA fell 1.34% to 25,502.32 on the week. The NASDAQ rose 0.26% to 7,326.06 on the week. The Cboe VIX jumped 27.95% or 3.92pp to 16.48% on the week. 
• The Stoxx Europe 600 fell 1.33% to 376.03 on the week– with highs Tuesday at 385.26.  The German DAX fell 2.75% to 11,364.17 on the week. The French CAC40 fell 2.5% to 5,269.92 on the week. The UK FTSE fell 0.29% to 7,207.59 on the week. Italy FTSE MIB rose 0.16% to 21,078.76 on the week. 
• The MSCI Asia Pacific rose 1.51% to 161.36 on the week. The Japan Nikkei 225 rose 1.6% to 21,627.34 on the week. The Hong Kong Hang Seng rose 0.35% to 29,113.36 on the week. The China Shanghai Composite rose 2.73% to 3,104.15 on the week. The India CNX Nifty rose 1% to 11,456.90 on the week.  The Korea Kospi rose 0.5% to 2,186.95 on the week while the Australia ASX rose 0.25% to 6,280.90 on the week. 

Fixed Income:

Inversion of curves in the US and elsewhere dominated focus with weaker global data driving aided by the FOMC shift to neutral and weaker forecasts. The negative yields in Europe matched Japan and doubts rose about the ability for BOJ and ECB to push growth and inflation higher. The week ahead will test the appetite for risk in fixed income as the US sees $339bn of Treasury supply - $108bn in 2-5-7Y notes, $18bn in FRN and $208bn in bills. 

• US bonds see curve flattening and inverting after weaker data globally, FOMC shift to neutral- for the week: 3M 2.45% flat, 2Y 2.32% off 12bps, 3Y 2.24% for 15bps, 5Y 2.24% off 16bps, 7Y 2.34% off 15bps, 10Y 2.44% off 16bps, 30Y 2.87% off 15bps. 
• Canadian 10-year bond yields fell 12bps to 1.60% on the week with focus on data and BOC need to reverse. 
• Japan JGBs see curve flatten with CPI and weaker data, - for the week:  2Y -0.17% off 1bps, 5Y -0.18% off 2bpbs, 10Y -0.04% off 3bps, 30Y 0.53% off 5bps
• Australian bonds rally sharply, curve inverts – for the week: 3Y 1.39% off 16bps, 10Y off 22bps to 1.77%.  New Zealand 10Y trades 1.99%, closes 2.01% off 9bps on the week. 
• China bonds see curve steeper despite mixed PBOC action– for the week: 2Y 2.76% off 7bps, 5Y 3.02% flat, 10Y 3.14% off 2bps, 30Y up 4bps to 3.76%. 
• UK Gilts see curve flatten after BOE and Brexit politics– for the week: 5Y 0.78% off 16bps, 10Y 1.02% off 20bps, 30Y off 22bps to 1.49%.
• German Bunds see negative yields over 10-years on weaker data– for the week: 2Y -0.55% off 2bsp, 5Y -0.43% off 6bps, 10Y -0.03% off 11bps, 30Y 0.60% off 15bps.
• French OATs see curve flatten with yellow vest and growth concerns, yields at record lows– for the week: 5Y -0.22% off 6bps, 10Y 0.36% off 11bps, 30Y 1.37% off 16bps. 
• Italian BTPs bear flatten with growth and banking fears– for the week: 2Y 0.23% up 6bps, 5Y 1.47% up 3bps, 10Y 2.46% off 4bps, 30Y 3.50% off 8bps. 
• Spanish 10-year bond yields fell 11bps to 1.09% on the week– election and rest of EU growth focus.
• Portugal 10-year bond yields fell 4bps to 1.27% on the week– with politics and budget focus.
• Greek 10-year bond yields fell 1bps to 3.79% on the week– with eye on growth and politics. 

Foreign Exchange:

The US dollar index 96.60 flat on the week.  In emerging markets, the USD was mostly bidfor the week– LATAM: MXN up 0.6% to 19.085, BRL off 2.45% to 3.906, ARS off 4.4% to 41.74; EMEA: TRY off 5.8% to 5.761, RUB up 0.3% to 64.596, ZAR off 0.5% to 14.486; ASIA:CNY off 0.15% to 6.7220, KRW off 0.1% to 1131.1, INR off 0.3% to 69.16. 

• EUR: 1.1315 off 0.1% on the week with US rates and EU rates the focus, weaker PMI reports driving – 1.1250-1.1450 keys. 
• JPY: 109.90 off 1.4% on the week with the 110 break opening 108 and lower risks. EUR/JPY 124.25 off 1.6% - reflecting equities and safe-haven flows.
• GBP: 1.3210 off 0.6% on the week with the risk of a no-deal Brexit returning despite EU granting extensions. EUR/GBP .8555 up 0.45% on the week with EUR holding despite ECB. 
• CHF: .9935 off 0.8% on the week as the risk-off moves drive safe-haven demand. EUR/CHF 1.1225 off 1.1%
• AUD: .7080 off 0.1% on the week and NZD up 0.5% to .6875 with alternatives to US and EU back in vogue.
• CAD: 1.3425 up 0.7% on the week with the BOC seeing yield curve invert, data suggest weaker economy ahead. 

Commodities

The S&P/GSCI total return index rose 0.44% to 2,532.32 on the week, with oil and precious metals supporting. For the week, biggest movers were hogs up 13.8% with rice next at 4.5% while losers were Lumber off 5.6% and coffee off 4%. 

• Oil: $59.04 up 0.9% on the week. Brent $67.03 off 0.2% on the week – with focus on global growth, US sanctions, refining vs. US output/exports and supply. $58-$60 in WTI and $67-$69 in Brent in play.
• Gold: $1313.10 up 0.9% on the week. USD flat but risk-off mood driving with negative rates in EU main story - $1305-$1325 back in play. Silver up 0.9% to $15.415 with focus on $15.50 as pivot. Platinum $844 up 1.9% on the week while Palladium underperforms $1564 up 0.25% on the week. 
• Corn: $378.25 up 1.35% on the week. Flooding and planting disruption now key focus over trade stories. Soybeans $903.75 off 0.6% - with some trade delays doubts. Wheat up 0.8% to $466 – all about weather. 
• Copper: $2.9150 off 0.35% on the week. May futures $2.8435 off 2.2% on the week.  Copper mixed with US housing vs. China demand and equity correlation. Iron Ore April Futures $83.82 off 0.73% with May $82.98 – focus shifts to China PMI next. 

Calendar for the Week Ahead:

Slow start to a busy month-end week ahead with Brexit and US trade talks still driving along with US politics and EU election risks. US bond supply will be a focus at $339bn – as will be the post FOMC speakers and the ECB annual conference. The China Boao Forum from March 26-29 will be watched for China plan shifts on stimulus and US trade talks. The central bank meetings from RBNZ, Mexico and SARB also will be watch to see how much more dovish you can be without cutting rates.  As for the data, focus is on trade, retail sales, home prices, starts and sales, PCE, final 4Q GDP reports, Confidence indicators for Europe from IFO to Commission economic sentiment, to US final Michigan consumer sentiment.  

Monday, March 25: German IFO, ECB/Fed speeches

• 0200 am Chicago Fed Evans speech
• 0500 am German Mar IFO business climate 98.5p 98.7e / current 103.4p 103e / expectations 93.8p 94.4e
• 0530 am ECB Coeure speech
• 0630 am Phil Fed Harker speech
• 1030 am US Mar Dallas Fed manufacturing 13.1p 7.0e

Tuesday, March 26: US housing prices and starts, Fed speakers

• 0430 pm RBA Ellis speech
• 0750 pm BOJ Summary of Opinions
• 0300 am German Apr GfK consumer confidence 10.8p 10.8e
• 0345 am French 4Q final GDP (q/q) 0.3%p 0.3%e
• 0345 am French Mar business confidence 103p 103e
• 0640 am German 2Y Schatz sale
• 0800 am Phil Fed Harker speech
• 0830 am Boston Fed Rosengren speech
• 0830 am US Feb housing starts (m/m) 18.6%p -6.7%e / 1.23mn p 1.218m e
• 0900 am Brazil COPOM meeting minutes
• 0900 am US Jan FHA house prices (m/m) 0.3%p 0.3%e
• 0900 am US Jan S&P/Case-Shiller house prices (y/y) 4.2%p 4.1%e
• 1000 am US Mar Richmond Fed manufacturing 16p 12e
• 1000 am US Mar Conference Board consumer confidence 131.4p 132e
• 0100 pm US 2Y note sale
• 0430 pm US weekly API oil inventory -2.133mb p +1mb e

Wednesday, March 27: ECB and Fed speakers, US and Canada trade deficits

• 0500 pm Korea Mar consumer confidence 100p 99e
• 0710 pm RBA Kent speech
• 0930 pm China Feb industrial profits 
• 0345 am France Mar consumer confidence 95p 96e
• 0400 am ECB Draghi speech
• 0445 am ECB Praet speech
• 0500 am Italy Mar business confidence 101.7p 101.3e / consumer 112.4p 112.0e
• 0640 am German 10Y Bund sale
• 0700 am UK Mar CBI retail trade 0p 5e
• 0700 am Kansas City George speech
• 0830 am Canada Jan trade deficit C$4.59bn p C$3.85bn e
• 0830 am US Jan trade deficit $59.8bn p $57.5bn e
• 0930 am ECB Mersch speech
• 1000 am Mexico Feb unemployment 3.6p 3.5%e
• 1000 am US 4Q current account deficit $124.8bn p $129.5bn e
• 1030 am US weekly EIA crude inventory -9.589mb p +0.5mb e
• 0100 pm US 5Y note sale

Thursday, March 28: Eurozone economic sentiment, German flash HICP, US final 4Q GDP, SARB rate decision, Mexico rate decision, Fed speakers

• 0500 pm Korea Mar business confidence 69p 71e
• 0400 am Spanish Mar flash HICP (m/m) 0.2%p 1.6%e (y/y) 1.1%p 1.5%e / National 1.1%p 1.2%e
• 0500 am ECB Feb M3 (y/y) 3.8%p 3.9%e / loan growth 3.2%p 3.3%e
• 0600 am Eurozone Mar economic sentiment 106.1p 105.9e / business confidence 0.69p 0.66e
• 0645 am Italy 5-10Y BTP sale
• 0715 am Fed Quarles speech
• 0800 am German Mar flash HICP (m/m) 0.5%p 0.6%e (y/y) 1.7%p 1.6%e / national 1.5%p 1.5%e
• 0830 am US 4Q final GDP 3.4%p 2.4%e / PCE core 1.6%p 1.7%e
• 0830 am US weekly jobless claims 221k p 220k e
• 0900 am SARB rate decision – no change from 6.75% expected
• 0930 am ECB Guindos speech
• 0930 am Fed Clarida speech
• 1000 am US Feb pending home sales (m/m) 4.6%p 0.3%e (y/y) -2.3%p -1.8%e
• 1130 am Atlanta Fed Bostic speech
• 0100 pm US 7Y note sale
• 0115 pm NY Fed Williams speech
• 0300 pm Mexico central bank rate decision no change from 8.25% expected. 
• 0620 pm St. Louis Fed Bullard speech

Friday, March 29: Japan and Korea industrial production and retail sales, German, French, Spanish retail sales, German jobs, US PCE, new home sales, Michigan consumer confidence

• 0700 pm Korea Feb industrial production (m/m) 0.5%p -0.6%e (y/y) 0.1%p 2.8%e / manufacturing 0.2%p -0.3%e
• 0700 pm Korea Feb retail sales (m/m) 0.2%p 0.3%e (y/y) 4%p 4.3%e
• 0730 pm Japan Feb unemployment rate 2.5%p 2.5%e / jobs/applicant ratio 1.63p 1.63e
• 0730 pm Japan Mar Tokyo CPI core (y/y) 1.1%p 1.1%e
• 0750 pm Japan Feb retail sales (m/m) -2.3%p 0.3%e
• 0750 pm Japan Feb industrial production (m/m) -3.4%p +1.4%e
• 0830 pm Australia Feb private sector credit (m/m) 0.2%p 0.2%e (y/y) 4.3%p 4.2%e
• 0300 am German Feb retail sales (m/m) +3.3%p -0.9%e (y/y) 2.6%p 2.8%e
• 0300 am German Feb import prices (m/m) -0.2%p +0.2%e
• 0345 am French Mar flash HICP (m/m) 0.1%p 1%e (y/y) 1.6%p 1.5%e / national 1.3%p 1.2%e
• 0345 am French Feb household consumption (m/m) 1.2%p -0.1%e
• 0400 am Spanish Feb retail sales (m/m) 0.3%p 0.2%e (y/y) 0.8%p 1.2%e
• 0400 am Spanish 4Q final GDP (q/q) 0.6%p 0.7%e (y/y) 2.4%p 2.4%e
• 0455 am German Mar unemployment changed -21k p -10k e / rate 5%p 4.9%e
• 0530 am UK Feb mortgage approvals 66.770p 65,000e / consumer credit G1.095bn p 0.9bn e 
• 0530 am UK 4Q final GDP (q/q) 0.6%p 0.2%e (y/y) 1.6%p 1.3%e / C/A deficit G26.5bp G23bn / business investment -1.2%p -1.4%e
• 0545 am ECB Coeure speech
• 0830 am Canada Jan GDP (m/m) -0.1%p +0.1%e
• 0830 am Canada Feb PPI (m/m) -0.3%p 0%e (y/y) 1%p 1%e
• 0830 am US Feb personal spending -0.5%p 0.3%e / income -0.1%p +0.3%e / PCE core (y/y) 1.9%p 1.8%e
• 0925 am NY Fed William speech
• 0945 am US Mar Chicago PMI 64.7p 61.2e
• 1000 am US Mar final Michigan consumer sentiment 93.8p 97.8e
• 1000 am US Feb new home sales (m/m) -6.9%p +1.3%e / 0.607mn p 0.619mn e
• 1205 pm Fed Quarles speech

Conclusions: Can consumers save the global economy?  

There is a rising doubt that the tools from 2009 – QE, zero or negative rates, forward guidance – are sufficient to correct the present slowdown in global growth from crashing into something larger.  The impact of trade tariffs, political confusions and credit bubbles (in housing worldwide, in corporate balancesheets) – all that drives fears that only a bigger investment boom from governments and the private sector can offset the present gloom. Charts from the BAML research are worth considering in this argument. 

The role of China policy in the present course seems more important than that of the US. The beachhead in Italy for Xi’s belt and road push looks more important as well for divisive EU politics. Markets are watching China stimulus to see how it plays out and what it does to global trade and investment. 

As for the US, the Goldilocks theme has been spooked given the global growth doubts and only something positive from Europe or China is likely to put the porridge back in play for investors. This means that the USD/EUR relationship has to change. Banks are the key underbelly of the EU story and their inter play with ECB policy remains at the core of FX. The way the EUR moves into month-end will be important in measuring if US divergence in the present matters as much as fear of convergence does in the future.  The fate of Europe becoming more like Japan than China or the US is play - watch 1.12 or 1.1450 for some signal of change and hope vs. despair.