E Markets: Steeper

Some people hike mountains, while others hike rates. Just when the climb seems most impossible, there will be a plateau with the glory of a view from the top. The IMF cuts it global growth outlook from 3.9% to 3.7% suggesting a growth plateau, and yet, rates are higher globally with curves steeper and US 10-year touching 7-year high yields. Equities decline in Europe and Asia and futures point to lower in the US. The USD is up at 8-week highs. This is a continuation of the Friday storm with the usual suspects – US/China trade war turning into a cold war; EU/Italy budget battles turning into a EUR breakdown/banking crisis; UK/EU Brexit no deal outcome leading to a UK recession and uglier politics; US mid-term elections leading to a frozen government with fiscal recklessness; EM crisis getting worse – see Pakistan request an IMF bailout complicated by its China belt-road obligations;  further natural disasters to drive up commodity prices and disrupt economies globally. There was little economic news that really drove the markets overnight leaving the IMF meetings as the focus. Things are clearly out of balance with financial stability no longer the third rail for central bankers. This puts the burden on markets to find equilibrium with the USD divergence in growth and policy standing out, the EUR is the focus with 1.14 and 1.1280 the next targets. 

Question for the Day: Is 2019 lower growth, higher risk? The IMF WEO update was released overnight and it highlights the usual risks – with rates going up, debt risk follow. The IMF correctly notes that the US isn’t the only central bank raising rates in 2018. 

The most interesting part of the WEO maybe in the US/China view of a prolonged trade war. “US growth will decline once parts of its fiscal stimulus go into reverse. Notwithstanding the present demand momentum, we have downgraded our 2019 US growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation. China’s expected 2019 growth is also marked down. Domestic Chinese policies are likely to prevent an even larger growth decline than the one we project, but at the cost of prolonging internal financial imbalances.”

What Happened?

  • Japan September EcoWatchers Outlook 51.3 from 51.4 – better than 50.6 expected, but current index 48.6 from 48.7 – weaker than 48.9 expected. The earthquake in Hokkaido and typhoons hit sentiment. The Cabinet Office left its overall economic assessment based on the survey unchanged, saying, "The gradual recovery continues." Last month, the government upgraded its assessment for the first time in five months. "Looking ahead, there are concerns over high costs and the impact of the trade dispute. But there are expectations for a recovery from the (natural) disasters," the Cabinet Office said.

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