E Markets: Hell

The road to hell is paved with good intentions. Markets are on this path as hope for owning risk starts with the best plans from political leaders and central bankers. There are plenty of hellish stories overnight to blame for the turn of mood in equities. The first being the weaker EU commission forecasts for EU growth that hits Italian bonds pushes the EUR lower and makes everything good about easy money look suspect. The second is that EU Donald Tusk warned of a “special place in hell” for those in the UK wishing Brexit with no plan. This grabbed headlines and leaves clear that Europe and the UK both suffer with this political divorce. The other EU story is from the European data where nothing comes up better but worse than expected for German and Spanish industrial production, Italian retail sales and the list goes on supporting the cut in EU growth forecasts. The third story is that of the RBI which surprised with a rate cut from 6.5% to 6.25% which quickly turned into a doubting game about political power over the central bank independence rather than one where monetary policy supports growth. Finally, the BOE had its own surprise as it retreats from its rate hike plans and cuts its growth forecasts into the abyss of Brexit uncertainty and geopolitical doubt. The BOE cut is 2019 GDP to 1.2% from 1.7% in November. This is lowest growth outlook since the great recession. The BOE joins India, Australia, Canada, and the US in backing away for rate hike plans highlighting the economic uncertainty. The winner in all of this is the USD and that becomes the bellwether for pain in other asset classes should the present rally extend beyond 97.55. 

Question for the Day: Is the ECB worried about growth yet? The ECB Bulletin out today highlighted the risk to the downside for growth, blaming protectionism, Brexit, EM volatility, policy uncertainty both fiscal in the EU and monetary abroad. The charts on ESI and PMI highlight the weakness of the Eurozone economy. 

Against this gloom, the message sent isn’t one of fear but expectation that the present weakness is an extended soft patch. The ECB notes the following: “Even though growth is expected to slow, which is consistent with a maturing business cycle in which labor supply shortages increase in some countries and saving ratios recover from their low levels, activity is expected to be relatively resilient owing to a number of factors, including the expected continued expansion of global activity, the accommodative monetary policy stance supporting financing conditions, improving labor markets, rising wages and some fiscal loosening.” Bottom Line – the ECB is banking on the consumer to save the day with wages expected to help.  The private consumption data will be key for understanding ECB policy moves through 2019. 

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