US economy

The surprise factor that fuels hope


FT subscribers can click here to receive Market Forces every day by email.

One surprise of late has been the upward turn in economic data exceeding forecasts, notably in the UK and eurozone.

The Citi Surprise index for the G10, US, UK and eurozone are shown below:

A bounce in Europe and the UK are helping drive the overall measure for major economies higher, but it still remains in negative territory for the G10. And before getting too upbeat, the tone of recent data still remains pretty bleak while the surprise measures also tell us that forecasts may have been too bearish. 

Currently, the US is lagging in the surprise stakes, a point reinforced on Friday by disappointing industrial production data for February, while manufacturing activity in New York state grew at its slowest pace in nearly two years.

That helped knock the 10-year Treasury below 2.60 per cent and just above its early January low, although the “bad news is good news” narrative (it keeps the Federal Reserve on pause) is working for equities as the S&P 500 consolidates above 2,800. 

This afternoon, I caught up with David Riley, chief investment strategist at BlueBay Asset Management, and he thinks:

“There is an emerging consensus that the first quarter is the trough for the global economy, reflecting the Beijing ‘put’ (China stimulus) which is particularly important for Europe.”

That said, the lack of conviction among investors, or what has been dubbed the “flowless” recovery as money has consistently been pulled from developed market equities for much of this year, is the other interesting side of the rebound in risk assets.

David thinks investors are suffering “muscle memory” from piling into risk early last year before equities hit turbulence and then of course late last year. That leaves many being “burned” by those experiences and unwilling to chase the rebound. Flip it around and the obvious pain trade is a grinding rally in equities from here that ultimately sucks in the holdouts or those with defensive portfolios.

As David concludes:

“The risk is that investors eventually capitulate.” 

Early days, but the Euro Stoxx 600 has nudged ahead of the S&P 500’s pace so far this month. And there are fans of deeply unloved eurozone equities as fund outflows from the region for 50 consecutive weeks represents the longest such run in a decade. 

Morgan Stanley believe euro area PMI hit a nadir in January and there’s a tailwind beckoning from China for the region’s equity markets. 

The bank says: 

“Historically, such a trough has signalled a better risk-reward for European equities going forward — they have always been higher in the subsequent 6 months.”

Some fodder for the value crowd, and those casting an eye across eurozone banks. 

By then the contrasting messages sent by low sovereign bond yields and rebounding risk assets should be settled. Or perhaps like Brexit it simply runs and runs . . . perish the thought.

On that note, a good weekend to all readers. 

Quick Hits — What’s on the markets radar

Japan’s yen for US credit — Flow data as of March 8 from Japan’s ministry of finance show a big pick-up in purchases of foreign medium and long-term bonds.

Bank of America says the ¥5.76tn of buying ($52bn) is the best start to a calendar year since 2012 and contrasts with “sales of $6bn and $33bn during the same periods in 2018 and 2017, respectively”. The bank pinpoints this demand as “one of the key reasons the US corporate bond market has been so strong this year, in our view”. 

Central bank watch — Looking ahead to next week, central bank meetings in Norway, Switzerland, and the UK will be overshadowed by a two-day meeting of the US Federal Reserve.

Expectations for the Fed are that officials will adjust their dot plot lower to show one rate increase is seen for 2019. That would still leave them behind the bond market, which has priced out further tightening. The other development to watch is whether the Fed outlines an end for shrinking its balance sheet. They should throw a bone to the market and keep the equity and credit rally on the road. This is a central bank that has shown its colours since the turmoil of December. 

Here’s BMO Capital Markets:

“Our expectations are for a lowering of the forecasted path of policy to reflect the diminished growth and inflation outlooks, although our sense is that it will be difficult for the median 2019 dot to fall all the way to zero implied hikes.”

Elsewhere, the Norges Bank is expected to tighten policy next week, making it one of the few G10 central banks able to do so. Here’s the view from TD Securities:

“While we have recently postponed our expectations for the next ECB and Riksbank rate hikes (among others), the Norges Bank appears on track to hike its key policy rate next week, and indicate another hike in H2 2019.”

Your feedback

I’d love to hear from you. You can email me on michael.mackenzie@ft.com and follow me on Twitter at @michaellachlan.





READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.