Uddrag fra Nordea analyse:
While Mr Market is starting to look complacent, the likelihood of further easing from the ECB and Fed as early as December has plunged lately. We consequently postpone further easing into 2020 while noting that, no, we’re not out of the woods yet.
What are we up to in this forecast piece? The tl;dr is as follows:
- Fed cut #4 postponed to March
- ECB easing package postponed to March as well
- Nationalbanken will follow ECB and cut rates to a new record-low
- FX: A more benign path for USD liquidity point higher for EUR/USD – in 2020
- FI: Haven demand and easing expectations to keep yields depressed for now
Risks? What’s that? Global slowdown? Old hat! A soft and cuddly Brexit is in the bag, the trade war has apparently morphed into trade peace. By now you have to express wonder at how many days, or weeks, in a row the market can react positively to benign stories on the China/US situation, for instance.
What we see is a Mr Market starting to get complacent, even though we do admit to seeing some positive news. To name two: the uptick in global PMI manufacturing in recent months (driven by China and the US – but for some reason not corroborated by equities and metal prices) and the Fed finally getting ahead of the curve in dealing with USD liquidity scarcity (no, it’s still not QE).
Nonetheless, the recent pricing-out of Brexit and trade war risks makes us keep a fairly defensive stance in our near-term FI and FX forecasts. For instance, a single tweet by the US president could bring about significant market volatility now that a lot of the risks have been priced out. Incidentally, just because the US curve has been steepening lately it does not mean that the global economy is out of the woods.
Chart 1: US curve steepening doesn’t mean the global economy is out of the woods
Updated ECB and Fed forecasts, with some Nationalbanken spice …
According to Fed Chair Powell at the latest FOMC meeting, another rate cut would require a “material reassessment of their outlook”. When linking that message to recent better-than-expected macro key figures, a softening in the trade war and a re-steepening of the yield curve, the Fed seems done for now. We are thus postponing our forecast for the next, and last, rate cut into March. Growth momentum remains weak and we expect a further slowdown with weaker ISM prints and payrolls, prompting the Fed to reassess its “moderate growth outlook”. On top of that, inflation expectations are still close to historical lows while we also see a clear risk of a correction in the equity and credit markets. In sum, we still think the macro picture justifies one more cut from the Fed.
We see the risk to our view as broadly balanced. A mild recession scenario (red line in below graph) could open the door for rates to go just above zero, while stabilised key figures (green line in below graph) could allow the Fed to stop, as it currently intends.
Chart 2: Our GDP forecast consistent with a modestly lower ISM composite in early 2020
On this side of the Atlantic, we are altering our forecast for the ECB – postponing the next easing package from December 2019 to March 2020. There is simply not enough time for Mrs Lagarde to get the split ECB to agree on more easing right now. We continue to expect a of 10bp cut in the deposit rate and an increase in the APP’s monthly pace from EUR 20bn to 40bn. The Euro-area economic outlook is weak and merits more monetary policy stimulus.
Indeed, we forecast growth to remain weak in the coming months and inflation to remain clearly below the ECB target at least until the end of 2021. We do not know much about Lagarde’s views as ECB president yet, which creates some uncertainty around the ECB’s future reaction function. Especially so because the Governing Council members are divided in their views and the president is likely to play a very important role in forming a consensus. However, we expect that Lagarde’s ECB will continue to do “whatever it takes”.
Chart 3: EA PMI composite still firmly in easing territory
