Economic and market perspective
The International Monetary Fund (IMF) lowered its global growth projections for 2019 to 3.3% from 3.5%, while noting it believed “the balance of risks remains skewed to the downside.” For 2020 though, the IMF projected an improvement of growth to 3.6%.
Euro-area GDP grew more than expected in the first quarter at 0.4% and 1.2% for the trailing year. Unemployment in the Eurozone declined 0.1% to 7.7% in February. However, other data such as manufacturing PMI declined to 51.3 in April from 51.6 in March.
Negotiations between the U.S. and China on trade have been ongoing with multiple delegations traveling between the two countries. U.S. Treasury Secretary Steven Mnuchin indicated he is looking for “substantial progress” in the next two rounds of dialogue; Mnuchin along with U.S. Trade Representative Robert Lighthizer are in Beijing the last week of April, which will be followed by Chinese Vice Premier Liu He’s visit to Washington the following week. Both sides have indicated that there has been progress on key issues such as intellectual property and forced technology transfers, but U.S. officials have expressed concern regarding enforcement mechanisms and timelines for removing tariffs.
While negotiations with China on trade have attracted the most attention, trade issues persist between the U.S. and both the EU and Japan. In April, the European Union Member States authorized the European Commission to negotiate with the United States on trade matters. The directive proposes “a trade agreement strictly focused on industrial goods, excluding agricultural products”; President Trump has indicated he would like to see agricultural products included and threatened to impose tariffs on European auto manufacturers if agriculture is not included. President Trump plans to travel to Japan in May to meet Prime Minister Shinzo Abe to discuss trade among other topics.
The deadline for Brexit was postponed until October 31, 2019 as it appeared no agreement would be reached by the already extended April deadline. The length of deferral was somewhat surprising as it allows the UK to remain in the European Union through May 23rd EU parliamentary elections, though Prime Minister May’s stated goal continues to be to exit the EU prior to the elections.
The Federal Open Market Committee is currently meeting (April 30 – May 1) with markets pricing in effectively no chance of a rate hike or cut at this meeting. As of the end of April, Fed Funds futures project a 0% probability of a rate hike and approximately a 70% chance of a rate cut by the end of the year.
Minutes from the March 19-20 meeting were released in April. The minutes stated that “a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.” However, the minutes also noted that “some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.”
Outlook and conclusions
In our view, U.S. economic data has yet to demonstrate the magnitude of slowing that many had feared. For example, while the first quarter GDP report included some less positive data, the headline number surprised meaningfully to the upside. Similarly, unemployment and wage numbers remain strong, even if off from peak levels, and inflation remains in a reasonable range. Even European growth, at least short-term, surprised to the upside. This data, along with better than expected corporate earnings, has created a supportive landscape for non-governmental fixed income sectors. Credit markets have largely reflected this reality in the recent tightening of credit spreads, reaching spread levels last seen prior to fourth quarter volatility; in this context, the credit sector is likely fairly priced. By contrast, interest rates appear more focused on the Fed’s language regarding policy outlook than recent economic data; the result is that rates have moved somewhat higher than last month, but on balance we believe the asymmetry is to moderately higher rates.