The Global Slowdown Could Soon Hit Home
No man is an island, as John Donne famously wrote, but the U.S. increasingly seems to be surrounded by slowing economies nearly everywhere else. That divide, which began to open in 2018, is becoming more acute this year.
From the euro zone to Oceania, estimates of gross domestic product were ratcheted down this week, sending interest rates lower around the globe. Rather than being bullish for risky assets like stocks and corporate bonds, the retreat in borrowing costs ought to serve as a warning about sputtering global growth.
As of last week, nearly $9 trillion of global debt securities had negative yields, half again as much as late last year, according to Bloomberg data charted by Deutsche Bank. The yield on the 10-year German Bund, the European benchmark, sank below nine basis points, or 0.09%, from over 50 basis points last October. The 10-year Japanese government bond yield sank a couple of basis points below zero last week.
Such yields indicate an extreme desire by investors to stash their cash in havens (it helps that global government bond markets have greater capacity than mattresses) amid increased signs of deceleration abroad. The European Commission lowered its estimate of 2019 GDP growth for the euro zone by nearly a third, to 1.3% from 1.9%. Italy is already in recession, while German growth is faltering as its export-dependent economy is being hampered by a slowing China, which in turn is a result of increased trade frictions and its domestic deceleration. Elsewhere, Australia’s central bank lowered its outlook for growth, while India’s central bank cut interest rates in a surprise move.
Amid these signs of sputtering growth, the U.S. Treasury 10-year yield dropped to a 13-month low of 2.63% while short-term borrowing costs eased, in effect undoing half of the Federal Reserve’s December 25-basis-point interest-rate hike. And while the major U.S. stock market gauges extended their advance over the past seven weeks, last week saw a trivial gain of less than 1%, reflecting a midweek swoon over global growth worries.
The equity market’s rise over that span can be viewed as a relief rally following December’s swoon, as the Fed shifted last month to a “patient” stance regarding future rate increases and greater potential flexibility about shrinking its balance sheet. While that attitude adjustment bolstered bullishness in the equity markets, Peter Boockvar, chief investment officer at Bleakley Advisory Group, observed that the decline in global bond yields in reaction to slower growth should remind investors why the Fed altered its stance in the first place.
Politics continue to hang over the markets as well, with another possible federal government shutdown looming on Friday. There’s little expectation of a replay of the previous shutdown fiasco, given that nobody gained anything from it. Markets were also upset by President Donald Trump’s admission that he won’t be getting together with President Xi Jinping of China before the March 1 deadline for the increase in tariffs on $250 billion of Chinese goods to 25% from 10%. While the timing of the eventual meeting of the leaders of the world’s two biggest economies may be uncertain, Cowen’s Washington watcher Chris Krueger predicts a “huge victory for Trump.”
The most recent monthly U.S. trade data show why further curbs are in nobody’s interest. The U.S. deficit shrank to $49.3 billion in November from $55.7 billion in October, which would mathematically boost fourth-quarter GDP (currently estimated to have grown at a 2.4% annual rate). But the smaller shortfall was due to a 2.9% drop in imports, a sign of slower U.S. demand, while exports fell 0.6%, reflecting sluggish demand abroad.
“The U.S. economy still appears to be sailing on serenely while the rest of the world economy sinks like a stone,” write the forecasters at Capital Economics. America remains a relatively closed and service-oriented economy, but the advisory firm suggests that eventually what’s happening overseas won’t stay there. That suggests the Fed’s patience is prudent, it concludes. But that may not be sufficient to spur gains in risky assets beyond the rebound seen since December’s debacle.