Macroeconomic Review -April 2019

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April 2019 Macroeconomic Review

Global Economy

o The optimism boosted by the dovish central banks and the possible trade deal has shifted recently towards       concerns about global economic growth amid the weak economic data, especially in Europe, and the sharp U-     turn in the Fed policy

o  Investors reaction to the increase in uncertainty caused sharp swings in financial conditions and sentiment. As a result we have witnessed a spike in volatility and a run to safety

o Prices of government bonds all over the world increased causing the yield to decrease and the yield curve to flatten and even to invert, a signal a recession may be coming and that the market is pricing in a dovish Fed

o Global economy and financial markets find it difficult to give up the cheap money era. Central banks all over the world that barely started to move towards normal monetary policy, find themselves, amid economic and financial conditions, thinking and even acting to hold or reverse some of their past actions and future intensions

o President Donald Trump’s declaration that he’ll keep tariffs on China until he’s sure Beijing is complying with any trade deal dims hopes of a near agreement that will lead to the removal of the tariffs already imposed

United States

o The US economy continues to produce mixed economic indicators that strengthen the assessment that economic growth is moderating due to the trade war, slowing of global growth and fading fiscal policy

o Leading economic indicators show signs of slowing activity. However, consumer sentiment is holding up after the end of the government shutdown, and hinting at better strength for consumer spending which accounts for 70% of GDP

o Labor market stalled in February as employers added only 20K jobs due to weather effects and government shutdown. However, the unemployment rate declined to 3.8% and hourly wages rose 3.4% from a year earlier at the fastest pace since 2009, both highlighting the fact that the labor market conditions are not materially deteriorating

oInflation is close to the Fed 2% target with YOY at 1.8%. However, the ongoing rise of real average hourly earnings indicate the possibility of inflationary pressures down the road

o The Fed decided to keep interest rates steady at 2.25%-2.50% and reassured its dovish stance by saying that “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient”. In addition the Fed lowered its forecast for the economic activity and stated its intention to end quantitative tightening by September. This decision marks the complete U-turn the Fed made in the last few months and will undoubtedly erode the Fed’s credibility and make investors worry


o After the weak growth at the end of 2018 and the flattening out of economic indicators at the beginning of 2019, recent indicators point to substantially and unexpected weak activity all across the board due to global and local uncertainties such as the never ending Brexit saga and the rise of protectionism and populism

o Leading indicators show that services are slowing but still holding up and that manufacturing is the main source of weakness with Eurozone manufacturing PMI for March falling to 47.6, the lowest in 6 years (a level below 50 indicates a contraction). Numbers in Germany and France were especially weak

o Consumer sentiment improved a little bit due to the strong labor market and accommodative financial conditions. While local demand is holding up, the main problem is the persistent deterioration of external demand

oInflation is stabilizing at a low level as headline inflation was steady last month at 1.5% and core inflation was unchanged at 1% with no signs of a significant increase anytime soon

oIn response to the unexpected weakness in the Eurozone economy, the ECB slashed its economic projections. Real GDP growth in 2019 reduced from 1.7% to 1.1% and inflation lowered from 1.6% to 1.2%, far below the inflation target. The bank stated that it will keep the interest rate at record low level until late 2019 and announced a new round of a long term financing operation in order to encourage banks to provide more credit

o ECB president, Mario Draghi, stated that the bank is ready to respond if necessary and will adjust its policy to reflect the new inflation outlook. This dovish statement is expected to keep weighing on the EUR

o The Brexit saga continues as the EU refuses to approve a long delay, May might loose her job and parliament took over the agenda


o Local economy shows signs of weakness over time as GDP grew by 3.3% in 2018 after 3.5% in 2017 and 4% in 2016. The global economic slowdown, especially in Europe and China two major trading partners, alongside local uncertainties (election, security, budget) are expected to weigh down on local growth

o Private consumption, the main driver of local economic growth in recent years, shows signs of exhaustion as consumer confidence is stabilizing after 5 years of climbing and the labor market is over the top

o Headline inflation increased by 0.1% in February above consensus forecasts but YOY inflation was unchanged at 1.2% and continued to stabilize near the lower end of the inflation target (1%-3%). Inflation is expected to stay in this low and tight range in the coming months and it likely won’t increase market fear that the BOI might become more hawkish

o After consolidating during February, the Shekel started to depreciate. Just as the appreciation was correlated to the narrowing of the interest rate differential from 3.2% to 2.5%, the stabilization of this gap provides a strong headwind that weighs on Shekel

o After all the big central banks capitulated in the last few months, amid global economic and financial changing conditions, the BOI is expected to get in line and keep the interest rate unchanged until early 2020