Monthly Macro Outlook: The Age of Hope

South Korea’s GDP is the perfect reflection of the weak Asian momentum. It was out at 0.4% QoQ in Q3 from 1% in Q2, which is in line with the slowdown thesis for global growth. Without much surprise, the BOK cut rates by 25bps to 1.25%, and we expect much more rate cuts from EMs in coming months, notably in Russia and in Indonesia. The main motivation to accommodate further monetary policy is mostly related to global capital flows and geopolitics. 

In Europe, we had confirmation that the weakness in the manufacturing sector is spilling over to services. The euro area PMI manufacturing is evolving at the weakest point since 2012 and the service sector, except for some countries like France, is becoming less resilient. On the top of that, Germany’s private sector employment is falling, albeit slightly, for the first time in six years. The latest data confirm that Q4 euro area growth will be close to flat. However, the situation is not bad enough for Germany to decide to implement a more significant stimulus package. Only a more accentuated deterioration in employment could become a game-changer and push the CDU and its allies to consider a massive fiscal stimulus. 

In the United States, the outlook is rather positive considering we are at the end of the business cycle. The broadest indicator to track the evolution of the economy is still well-oriented. The CFNAI (Chicago Fed National Activity Index), which is based on a weighted average of 85 existing monthly indicators, is at 0.1 (the three-month moving average is standing at -0.06) while the long-term value is at 0 and the risk of recession at -0.7. We still think the risk of recession is rather limited in the next 6-9 months. 

It will be all about politics again

In the coming weeks, politics will be at the center of attention. We identify five main market movers.

October 28^th: China’s Communist Party is set to hold a key meeting. Traditionally, the Fourth Plenum is devoted to political reforms and party building but, considering the ongoing economic situation, it will also certainly focus on economic stimulus and the ongoing negotiations with the United States. It should also be the occasion to assess the impact of policies decided in last year’s Third Plenum. We don’t expect any immediate macroeconomic or political change following the meeting.

October 30^th: A new rate cut of 25bps by the US Federal Reserve is a done deal. The market is now pricing over 90% odds of a rate cut.

November 1^st: Former IMF chief Christine Lagarde replaces Mario Draghi. In his latest press conference yesterday, Mario Draghi has done a fine job setting up policy for at least the next two or three ECB meetings. However, we still believe that Lagarde’s appointment may be challenging considering she does not have a strong monetary policy background. Lagarde and her vice-president, De Guindos, mostly bring management experience to the position but, if the economic outlook does not improve fast, we will need policymakers that are able to think out of the box and bring fresh ideas and strategies, which might not be the case of Lagarde. The risk is high that we will see her leadership questioned by hawkish members of the Governing Council and that it will shift the balance of power to the governors of national central banks and the ECB chief economist.

November 10^th: Legislative elections will take place in Spain. The polls indicate there is no clear coalition emerging. The PSOE is still leading the polls, but support in its favor is declining to levels close to April election, whereas PP is gaining more support. Podemos is stable. As of now, the only viable coalition would be a grand-coalition PSOE-PP which would be a first in Spain’s history.

November 16^th-17^th: The United States and China could agree on a mini trade deal at the APEC Summit in Chile (“phase 2” of the negotiations). In our view, what will certainly matter the most is whether a currency pact will also be part of the mini deal as it could push the DXY lower and increase risk appetite. It does not mean that trade tensions will disappear overnight, and that global trade will escape from recession. Nonetheless, it could have a positive effect on confidence and growth momentum, and it could give a decisive boost to EMs that are among the most dependent on manufacturing to growth, especially in Asia.