Global PMI manufacturing has now dropped since Dec-17, and we get the feeling everybody has become bearish by now: being bearish has become boring (but not necessarily wrong!). Today, we have decided to list the arguments for the bullish case.
Table 1: Our current convictions
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The only thing worse than being bored is being boring – Jean Baudrillard
The Devil’s Advocate
A buyback blackout is starting. A full moon nears (March 20). US liquidity is tightening owing to ongoing QT. US tax receipts will furthermore “slurp” US excess liquidity by mid-April (though definitely not with a plastic straw!). And for sure, Q2 EPS estimates look lofty. All of this may depress risk sentiment. That said, we started becoming bearish on global macro, and especially on the industrial cycle, in late 2017. Global PMI manufacturing has now been dropping since December 2017, and we get the feeling that by now more or less everybody has become bearish as well: being bearish has become boring (but not necessarily wrong!).
While we remain bearish on risk sentiment over the medium term, see Nordea View, we figured it would make for a fun exercise to find arguments which could wrong-foot the now bearish macro consensus. We therefore don the robe of a Devil’s advocate.
Chart 1: US GDP weak at the start of 2019
Yes, US and global growth is likely to have started 2019 on a very weak note. The G10 surprise index has not corroborated the risk-on mood so far in Q1, but markets have shrugged off bad data.
How can it be? We find several reasons: i) the Federal shutdown was always going to make data noisy (and hence less of a signal), ii) the equity market turmoil in 2018Q4 was always going to spill over negatively, but that’s old news given S&P500 around 2800, iii) global activity in 2018H2 was likely buoyed by tariff threats which triggered a front-loading of activity, meaning that global trade was always going to fall off a cliff later, and iv) semiconductor weakness may relate to the earlier crash of crypto currencies as well as from intel CPU shortages.
Chart 2: S&P500 EPS expectations looking lofty (for Q2)
S&P 500 EPS estimates for Q2 look lofty in our view, as they are expected to rebound 10% after a 7% drop in Q1 – a stronger rebound than in 2016. These expectations do seem to go hand in hand with the idea that several temporary factors have depressed Q1 activity. And one could argue that even if Q2 estimates does look lofty, if financial conditions stay easy, then global activity/world trade and semiconductor sales may rebound in Q2/Q3, almost like in 2016.
Chart 3: If US financial conditions stay easy, then semiconductor sales could accelerate sharply
Moreover, the Federal Reserve has turned dovish in three different ways: i) the Fed has signalled a “patient” approach to interest rates (no hikes until H2, or in a long time), ii) it has also signalled an end to Quantitative Tightening (the discussions of a new repo facility might even be viewed as a weird form of new QE), iii) heavy-hitting Fed officials have also started to talk up the notion of accepting substantial inflation overshooting, which means that an acceleration of core inflation won’t necessarily trigger tighter Fed policies. The risk of a policy mistake, and of recession, has been reduced as a result.
Chart 4: Lower US real rates helping S&P500 perform
Indeed, by targeting average inflation (an idea mulled by Clarida, Williams & Daly), Fed would create a great deal of flexibility. An acceleration in core inflation could even mean lower real rates if the Fed decides to let inflation run high to make up for previous inflation undershoots. And if the MMT story has got legs – under a new Democrat president in 2020 – or why not under Trump? Then real rates will come under plenty of pressure.
Chart 5: Low US real rates is good news for EM bonds/inflows
A Fed on hold has helped depressed US real rates which are now as low as in the beginning of 2018. This has likely contributed to the easing of financial conditions in EM Asia – which could help world trade growth bottom.
Chart 6: Easier financial conditions in EM Asia could indicate a bottom in world trade
China/US trade talks are ongoing. While a deal has been delayed into April, if Trump and Xi do strike a deal without its details implicitly targeting EU (a definite risk in the wake of Germany’s and Italy’s behaviour on Huawei/5G, OBOR and NATO), it ought to be good news…
A trade deal would likely i) stabilise growth outside of the US (incidentally USD-negative), ii) cause a quicker build-up of FX reserves because of greater trade growth (USD-negative because of diversification reasons, but also positive for global USD liquidity), iii) reduce global uncertainty which would be good news for capex growth, iv) reduce the demand for haven assets (Treasury bonds, the USD).
Chart 7: If global uncertainty eases, it could dent the dollar and be good for global growth
That the CNY has strengthened vs the USD is also good news, since this lessens the devaluation pressures on other Asian currencies, and in our view could be good news for global growth. On the topic of the CNY, MSCI’s decisions to increase China’s EM weight from 0.7% to 3.5%. This, and MSCI’s calls on China to increase the foreign quota on equities to 28% could boost inflows into CNY later this year and make it easier for Chinese authorities to control the FX rate even if they were to ease monetary policy further.
Chart 8: Stronger CNY might be a good sign for global PMI
The previous drop in Chinese rates and yields may already be about to fuel monetary acceleration (M1) at a time when the Li Keqiang index is already suggesting some upside risks to industrial metals.
Chart 9: Li Keqiang index suggests upside pressure to metal prices
Finally, given the drop in EUR rates and of the trade-weighted EUR over the past year, Euro-area PMI composite may feel some tailwinds in coming quarters. Indeed, one stimulus indicator suggests that PMI composite could rise to 54 this autumn. This would indicate growth ABOVE the ECB’s latest forecast. Fun times!
Chart 10: EA stimulus indicator indicates a rising PMI composite
What if everything is not going down the drain? What if the future’s so bright, you gotta wear shades? No wonder there’s a distinct lack of conviction in the foreign exchange market…
Scandis: Will Norges Bank copy/paste September 2018?
The NOK has performed well over the past week, indeed much in line with the 2018 pattern. While the 2018 pattern suggests the coming days should be days in which to scale back NOK longs, our economists expects NB:s rate path to be on the high side vs market expectations. Tighter Norwegian liquidity also suggests some further downside to the cross. Our view that the USD will weaken further should also help our CADNOK short perform a bit further.
Chart 11: EUR/NOK – 2018 analogue suggests it’s time to scale back shorts
The big if for a positive NOK view in to this week, is whether Norges Bank decides to copy/paste the September-2018 hike. Our regression model (based on proxies for Norges Banks input variables) suggests that the end-point of the rate path could be taken up to 15-25 bps lower. In September-2018 a dovish long-end of the rate path was more than enough to counter the short-term hawkishness from Norge’s Bank. We stay short USD/NOK (via the debt ceiling basket) and CAD/NOK, but just as much for USD reasons.
Chart 12: Will Norges Bank lower the end-point of the rate path materially to cushion the hike?
The SEK has finally seen some tailwinds with EUR/SEK at least temporarily breaking below the uptrend since January 1 (possibly due to the maturing 1052 bond which reduced Swedish excess liquidity). The uptrend in USDSEK also appears kaput. The relationship between Swedish economic surprises and the SEK, as well as that between inflation surprises and the SEK, suggests some further modest downside to EUR/SEK.
It’s hard to be medium-term constructive on the SEK given i) the upcoming dividend season and ii) the risk that Riksbank decides to massively expand its balance sheet at its April 26 meeting – unless the positive story told by the Devil’s Advocate has legs…
Chart 13: Stimulus from weak SEK suggests Swedish growth could accelerate to 3.5%
Our house view is that the Devil’s Advocate is just wrong, and that Swedish growth will generally disappoint in the near term for several reasons: global trade weakness, capex weakness, a weaker housing market keeping consumption growth weak, and so on.
But what if market participants are now generally underestimating the resilience of the global economy? And Trump/Xi reaches a decent trade deal which does not impact EU negatively? Then the effects from a very weak SEK could do wonders for Swedish growth. The above stimulus indicator – based on mortgage rates and (primarily) the SEK – did predict the 2.4% GDP growth outcome in Q4, and currently signals an acceleration towards 3.5%-4%. Wow.
At this juncture we prefer to pay Swedish rates and/or bet on a steeper 2/10 curve. There’s a lack of domestic triggers, but a dovish Fed who perhaps outlines details on how and when QT will end would be helpful for such a view, and a lot of negativity should have been priced in following the ECB’s meeting in March.
Rest of G10: Time for AUD/NZD to shine?
The postponement of the Trump/Xi summit has given our AUD/NZD longs a lukewarm start, but if the Devil’s advocate view presented above proves just semi-right, it should pave the way for higher AUD/NZD before long. Easier financial conditions in Asia speak in favour of higher AUD/NZD 2-3 months down the road, as Australia is more obviously linked to the current hard-data misery in Asia, and hence would gain more from a relief.
Chart 14: AUD/NZD to rise if financial conditions ease up more in Asia.
Also, relative domestic data-surprises speak in favour of Australia versus New Zealand currently, but we are yet to see it in either the AUD/NZD or the relative pricing of RBA vs RBNZ, probably as Chinese, Korean and Taiwanese data prints have not really been helpful (yet). Positioning wise, the market is now long (!) NZD, but still ultra-short AUD on CFTC data (which is also one reason why we stick to long EUR/NZD as well).
Chart 15: Relative data surprises should underpin higher AUD/NZD levels by now
Lastly, let us remind you that USD/JPY usually drops between now and the 23rd of March due to crowded JPY buying into the fiscal year-end. The peak of that story is though reached already the 23rd (not later), which is worth bearing in mind. We stay short USD/JPY as part of the debt ceiling basket and anticipate a move lower this week.
Chart 16: USD/JPY usually drops between now and 23rd of March (data from past 11 years)
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