May economic update: Just when things were looking up
Just as pockets of optimism had begun to emerge in the global economy, trade tensions are back, though we still think a US-China trade deal remains likely. But in the meantime, trade uncertainty, as well as risks relating to forthcoming European elections and Brexit, suggest that financial market caution is likely to stay with us for a little while longer
Trade tensions return
Just as pockets of optimism had begun to emerge in the global economy, trade tensions are back. President Trump has taken the trade war a step further with the imposition of fresh tariffs on China, which also raises questions about the possibility of auto tariffs. We still think a US-China deal remains likely, not least because President Trump will not want a damaged economy and stock market as he heads into a key election year. But in the meantime, trade uncertainty, as well as risks relating to forthcoming European elections and Brexit, suggest that financial market caution is likely to stay with us for a little while longer.
The re-emergence of US-China trade tensions has spooked financial markets, but ultimately we still think a deal is likely. Failure to get a deal, perhaps coupled with further tit-for-tat tariff hikes, would be harmful to both economies and would hit equities. Such an environment would be deeply damaging for President Trump’s chances of re-election in 2020, so we suspect the latest move is designed to extract last-minute concessions from China, rather than a serious effort to trigger a larger global trade war.
However, stronger-than-expected growth in China following earlier fiscal and monetary stimulus provides its government with some extra chips when it comes to renegotiating. The negotiations concern much more besides trade – China’s ability to export its 5G network, coupled with geopolitical tensions in the South China Sea, also matter.
The US economy
Despite the ongoing uncertainty, the US economy continues to prove the doubters wrong, following another robust GDP growth figure for 1Q19. The economy is adding jobs in significant numbers, while financial conditions continue to improve thanks to rising equity markets, a strong and stable dollar and falling mortgage rates. Inflation could rise more quickly than the market anticipates given rising fuel costs and wage pressures emanating from the labour market. While financial markets continue to price in interest rate cuts, the Federal Reserve is maintaining a cautiously upbeat tone that signals stable monetary policy through 2019.
The Eurozone also saw stronger-than-expected first quarter growth, which was probably helped along by a normalisation of the exceptional factors that had held back growth in the second half of last year. But while a recession certainly doesn’t look imminent, a growth acceleration also seems unlikely. The rise in April inflation was caused largely by calendar effects so there’s not much sign of an upward trend. All this suggests the ECB will stay put for the time being.
The UK's ongoing dilemmas
In the UK, there are good reasons to think that the Brexit deadlock won’t be broken before the new October Article 50 deadline. Cross-party talks don’t appear to be making much headway, while there remains a risk of a summer Conservative Party leadership battle. A further extension to the Article 50 period is perhaps more likely than not. But while we think a ‘no deal’ exit will be avoided, firms will have to continue making preparations and this will keep a lid on economic growth over the summer months.
May is typically a bad month for EUR/USD. 1.10 looks the target this summer as US data holds up well and the ECB contemplates the signals it wants to send with the TLTRO III in June. A surprise decline in the Renminbi would also shake up the low volatility mood.
While risk assets have rallied off earlier lows, the US 10-year yield has not managed to budge much from the 2.5% area. However, the positive macro-story in the US, coupled with the fact that a Fed rate cut remains some way off, suggests the balance of risks are slowly swinging back in the direction of a test higher for market rates.
Tags
May Monthly UpdateDownload
Download report
13 May 2019
What’s happening in Australia and around the world? This bundle contains 7 articles
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).