May 23, 2019

Looking Beyond GDP Figures, What are Markets Saying?​

​There is much debate about the direction of the U.S. economy these days with nervousness over trade tensions, credit accumulations, Federal Reserve policy and more. All add up to variables that can put the brakes on business expansion. With all that in mind, I wanted to take a step back this week to look at a few other economies and dig deeper into the numbers.

In the United States, gross domestic product (GDP) famously came in at 3.2 percent for the first quarter, but that number reflected the build-up of inventories and an unexpected improvement in the trade balance, factors that are expected to reverse in the future. Notably, trade improvement resulted from a drop in imports, even as import prices fell. Other countries mirror similar economic activity. In Japan, first quarter GDP came in stronger than expected partly due to improvements in net exports.

This boost to net exports was due to weak domestic demand causing imports to drop more than exports. Additionally the usual drivers of the economy — exports, capital spending and private consumption — all declined during the quarter, with exports tumbling 2.4 percent, the most since 2015. In the United Kingdom, GDP rose on stockpiling of goods in anticipation of economic uncertainty due to Brexit.

Another, and arguably better, metric looks at how markets are predicting central bank policy. Bloomberg tracks futures pricing tied to central bank benchmark interest rates for 10 economic areas: the U.S., Eurozone, UK, Canada, Australia, New Zealand, Sweden, Japan, India and Mexico. Fed futures are currently pricing in a 50/50 chance there will be a cut in interest rates by the Federal Reserve by the September meeting and a 77 percent chance of a cut by the end of the year.

Mexico remains an outlier. Bloomberg reports that there is an expected 61 percent chance that Mexico will hike rates by the end of the summer, but that is primarily to rein in inflation. All the other countries and economic areas are either forecast to stay put or even cut rates. Analysts forecast rate cuts by the Reserve Bank of Australia and Reserve Bank of India in June and the Bank of New Zealand by fall.

My View: Despite green shoots in certain parts of the world, overall global data remains weak at a time when geopolitical risk has escalated. Despite a long list of risk factors—the probability of fail outcomes in Brexit has increased, brinkmanship between the U.S. and China could trigger a market correction, and the U.S. can still impose auto tariffs on the E.U.— assets remain supported and volatility remains historically low. With the markets pricing in “perfection,” odds favor a spike in volatility should just one of the markets' assumptions be disproved. 

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