MACRO

Suffering an input overload!

Steen Jakobsen

Chief Economist & CIO

Summary:  It’s getting increasingly difficult to keep score on all of the risks converging on global markets and the growth outlook. Just back from holidays, this is my attempt to evaluate these risks in order of significance…


You can't know too much, but you can say too much. - Calvin Coolidge 

What is clear for this old macro guy is that all the warning signs are flashing DEEP RED.

  • AUDJPY – the classic risk on/risk off currency pair is trading multi-year low @ 71.10
  • Global and US yield curves are screaming recession: 2y-10y @ +4 bps, 3m/10y @-34 bps & best predictor of FED – the near-term forward is -53 bps next six quarters.
  • Gold relative to everything is rising, despite more deflation incoming
  • Earnings recession in the US and globally
  • Singapore – the ultimate open economy is seeing a collapse in retail sales & exports, a sign of global disruption
  • Germany will print the first leg of its recession numbers Wednesday and given its reluctance to ease on the fiscal side will take France and Italy with it into a deep European recession
  • Early signs of escalation from simmering trade war to open foreign exchange open war

Portfolio actions:

  • We are still structurally long gold as per our earlier calls
  • We are also continuing overweight US treasuries – long since December Fed hike
  • Underweight equity – as per note post July FOMC
  • Short GBP, AUD (most negative credit impulse) – Long JPY, XAU (gold) – neutral: EUR, Scandies, CAD

Expected policy response:

  • FOMC will cut by 50 bps in September – we keep target of 100 bps total cuts through December FOMC meeting – 50 bps in 2020 and zero in 2021
  • ECB will lower steering rates and try to force EURUSD lower – in vain….
  • BOE will cut aggressively through balance of 2019 – GBP to 1.15 if not 1.10
  • BOJ in a pressure cooker on FX side as global yield spread converge – needs to change policy mix – watching for signals
  • Fiscal season starts in September – we expect expansionary push of minimum 0.5% of global GDP – unevenly distributed and hidden under headlines like: Green, environment, inequality fight and infrastructure overall
  • Lower price of money does not work when amount of credit is falling – hence lower rates will only worsen downside in inflation
  • Gold will be hoarded by central banks as a world of negative yields force their hands-on asset allocation away from negative yielding government financing to zero cost Gold tangible asset – would not be surprised to see 1600 and even 1800 in big end of year rally.

China CNY Fixing/Devaluation
The magic “line in the sand” of 7.00 CNY per USD was broken last week and since then China has allowed its currency to slide by 2% in CNY terms. This is probably the single most important change to world foreign exchange policies since…Bretton Woods? It extends the trade war to foreign exchange and away from multi decades of controlled and G-7 coordinated deal/interventions to offset trade deficits and structural issues.

Make no mistake: This is one of the single biggest paradigm shifts we have had since the global financial crisis of 2008-09. The major global economic powers are further away from multilateral agreement on nearly everything than at any point during the last decade. Their central banks agree on lower rates (which will not work). Now comes an outright competition to devalue their currencies. Trade war + FX war = Recession & political noise. The blame is not on the US or China only, it’s everywhere – take the ECB, for example, where perma-dove Draghi has always had both eyes on the Euro, and look at Asian FX since last Monday’s escalation (the Trump announcement of further tariffs from September 1):

Asia FX index – almost taking out low…. China devalues, so does Asia...

Source: Bloomberg

German recession – this week (Wednesday August 13th – Consensus: -0.3% YoY) will confirm what assets in Germany is already pricing: a deep recession. This happens despite plenty of room for fiscal stimulus as Germany’s budget surplus runs at +1.5% of GDP. Germany in recession will accelerate negative trends in France, Italy and rest of Europe. Both Italy and France are in violation of the 3.0% Maastricht criteria as I write this – imagine where it ends with present political turmoil in Europe by December 2019.

German IFO – it doesn’t get much worse than this…

Source: Bloomberg

DAX Index testing 200 simple moving average

Source: Bloomberg
Global yield curve and yields continue to reflect global recession risks. US 30y yield traded 209 bps – 209 bps! This week – virtually matching the record low from 2016. Yield curve 2y vs. 10y is now at only 6 bps!
Source: Bloomberg

Brexit or rather the lack of it now risks sending UK into a deep recession. The constant delay is now met by sizeable credit contraction impulse which to us confirms our overweight negative GBP view.

All of the actions by central banks will only make things worse – driving yields lower and more and more debt yielding negative return.

The combination of the current multilateral frameworks and trade relationships under attack and central bank action in the pipeline dictates: …more of the same before we get the final break-out from their utterly futile exercise of buying time.

The “productive Homo Sapiens” is all but destroyed and replaced by policies that only reinforce zombie behavior. But once the central banks have fired their remaining futile bullets not far beyond the balance of this year, macro and political developments will gallop into gear and shape the politics for decades to come.

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