• Green shoots in East Asia
• S&P500 estimates consistent with V-shaped profit recovery
• Will China M1 growth boost green shoots narrative?
Equity bulls have had the upper hand over the past week, with risk sentiment generally being fuelled by signs of some green shoots in the global economy. Positive remarks with regards to global trade tensions from China’s Xi Jinping and US’ Donald Trump have also helped. Purchasing Manager Indices this week managed to top expectations in China, Korea, Taiwan and the US (ISM), while the final version of the PMI composite in the Euro area was revised higher. Market participants have consequently needed to put a higher probability of a non-recessionary scenario playing out later in 2019 and 2020.
Chart 1: East Asian PMIs offers glimmers of hope
Of course, some of the improvement in the East Asian figures might be explained by the timing of the Chinese New Year. When a new year starts in February, the PMI compiled by the Chinese government tends to rise substantially. However, the improvement was corroborated by less problematic PMIs compiled by the private sector, by industrial metals, and was also predicted by the recent easing of financial conditions in Asia.
Chart 2: Global PMI manufacturing vs industrial metals – light at the end of the tunnel?
The situation does remain fragile however. Similar signals from industrial metals such as the one in early 2012 or late 2015 were nothing but false starts for the global economy. Admittedly, global PMI then improved temporarily, but soon started to fall again. Some of the rise in metal prices has also come about for adverse reasons such as a dam disaster in Brazil and a cyclone in Australia (impacting iron ore).
The plunge in US real rates, which have fuelled inflows to Emerging Markets and thereby eased financial conditions, may also be running out of steam. If that is the case, global growth may have stabilised, but a V-shaped recovery would still seem to be unlikely.
Chart 3: S&P500 EPS expectations – V-shaped profit recovery after Q1 crash
The enormous repricing of the Fed over the past couple of months has led to a marked drop in US real rates which has not only fuelled inflows to EM, but also underpinned equity market valuation. The risk rally has not had much if any support from earnings revisions. This is interesting because the report season kicks off in earnest over the next couple of days, and the consensus is looking for an 8.2% drop in EPS for the S&P500 index in the first quarter. After the first quarter, a quick V-shaped rebound in earnings is supposedly on the cards. Equities may need the green shoots growing into hulking trees or else they risk a Wile E. Coyote moment at some time later this year (we recommend defensive positioning, see Nordea View).
In fixed income …
In the fixed income space, the “recessionistas” have faced headwinds for much of the same reasons, and if the green shoot story has some more legs it suggests EUR inflation expectations may be very low currently. This would also mean that market expectations of the ECB might need to be reassessed in a less dovish direction later this year. The EUR 10y swap rate is likely to remain capped in the near term at 60bp – the downtrend since October.
Chart 4: EUR inflation expectations too low if green shoots continue to materialise
Improving sentiment has also paved the way for a modest bounce in the US 10y yield. If the global green shoots grow into trees, the US 10y yield could gradually be pressured back towards 2.70% – if, for instance, the market were to start to believe the Fed won’t cut rates at all over the next 12 months.
Chart 5: US 10y yield has bounced as the front end has been repriced
In Scandinavia, Sweden’s PMI manufacturing topped expectations in March. This too can be viewed as a green shoot, as headline PMI as well as its details have led Euro-area figures over the past 2.5 years or so. At this juncture, both the Euro area and Sweden could be about to feel tailwinds from weaker currencies, which could help growth stabilise or pick up (not our forecast) if the global manufacturing cycle doesn’t continue to deteriorate as we expect it will.
Chart 6: Swedish PMI details a good sign for Euro-area PMI manufacturing
Norway is looking great as usual. Wages were close to Norges Bank’s forecast, PMI topped expectations and house prices were in line with Norges Bank’s expectations. We lifted our target for the NOK DEC19 FRA in the past week: Don’t fight Norges Bank: Pay the NOK short end. Industrial production disappointed in Norway, but this won’t change anyone’s mind. Norway is doing well, and Norges Bank will likely hike in June.
What is most important in the week ahead?
Will the green shoots wilt or not? That’s the question of the week. Will small business optimism remain robust in the US on the NFIB survey? (Tuesday), and will the same hold for consumer sentiment in the Michigan survey on Friday?
In the NFIB small business survey, respondents are asked about their “biggest problems”. After being increasingly dissatisfied with government regulation and red tape under President Obama, the election of Trump brought a trend change. Maybe we and others are underestimating the effects on “animal spirits” in the US from Trump’s deregulation?
Chart 7: Small businesses increasingly happy about taxes and deregulation under Trump
The ECB minutes did not discuss tiering interest rates according to latest minutes, and while a tiered system may eventually end up becoming policy, the upcoming meeting will be closely scrutinised for clues on the ECB’s risk assessments and TLTRO3 details.
Minutes from the Fed’s latest meeting are up for grabs on Wednesday. The Fed has turned dovish in three different ways in a mere three months (on rates, on the balance sheet, and signalling tolerance for inflation overshooting), and with recent upside pressure on the Effective Fed Funds Rate one cannot help but speculate that another IOER rate adjustment, an earlier end to QT or perhaps a repo facility might be needed at some point.
Chart 8: EFFR has been pressured higher as US liquidity has dwindled
China’s monetary statistics are due between 10 and 15 April and will likely be important for global sentiment. China’s M1 growth recently ticked a touch higher and is expected to pick up further by the consensus. If this materialises, market participants may increasingly come to expect further improvements in Asian activity. Chinese trade data for March will also be closely scrutinised on Friday (April 12).
Chart 9: Will China money growth pick up further after recent stimuli?
International politics remain noteworthy. US Vice President Pence recently warned Turkey that the US “will not stand idly by while NATO allies purchase weapons from our adversaries”. He also said Germany’s NATO stance was “unacceptable”. Indeed, even if China and the US manage to put a trade deal together, who’s to say the EU28 isn’t next on Trump’s chopping block? The EU28 has been quite friendly with China lately, which might lead the US to implement tariffs on the EU – tariffs which could crush any European green shoots. Let’s see what the EU-China summit on Monday 9 April can bring.
In Scandinavia, the main event is Swedish inflation due on Thursday 11 April. After two inflation disappointments, the market is increasingly expecting a dovish response from the Riksbank later in April, such as another flattening of the repo rate path and/or a decision to expand its balance sheet once more. We expect CPIF inflation at 1.7% – 0.6pp below the Riksbank’s latest forecast and 0.1pp below the consensus. Swedish March CPIF preview: The misery continues. While the risk to our forecast is balanced, one upside risk stems from imported goods prices. If anything Norwegian inflation surprises lead Swedish ones by one month, and Norway saw a “ketchup effect” of imported inflation in February. In contrast to Swedish developments, we expect inflation well above target in Norway.
Chart 10: Swedish inflation disappointments are pressuring Riksbank to tilt dovishly
Key research pieces over the past week:
Sweden: Stable PMI (1 April)
The flat tyre in the German car industry (1 April)
EM Traffic Light March 2019 (2 April)
Update of Nordeas callable bond model (3 April)
USD hedging costs may have peaked (4 April)
ECB Watch: Growing concerns (4 April)
China View: Another soft landing (5 April)
The week starts off slowly with a print of Swedish industrial production.
On Tuesday, markets will focus on the latest release of the NFIB small business survey in the US, the EU-China summit in Brussels and monthly GDP figures from Norway.
Wednesday is a big central bank day with the ECB announcing its MPC decision and with the latest FOMC minutes being released. On the inflation front, we get figures from the US, Norway and Denmark. The UK draws plenty of attention as Brexit is on the agenda at the extraordinary EU-summit. From Sweden we get a new release of the Prospera inflation expectations survey.
Thursday is another day of inflation with figures from Sweden and China, as well as final data from Germany and France. India commences its 6-weeks-long general elections and the Fed’s Clarida (neutral, voter) speaks.
The week rounds off with industrial production figures from the Euro area and a new print of the Michigan consumer sentiment index from the US. We get trade figures from China and finally, the UK might leave the EU at midnight, if no further Brexit extension has been agreed upon.