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11 June 2019


The markets are being challenged by macroeconomic data.

Last week, US jobs data fell well short of expectations. Wage growth declined as well. No doubt about it, growth is slowing down. And the Fed knows it. The Atlanta and the NY Fed departments have second-quarter GDP growth now penciled in at anywhere between 1 and 1.4%. A perfect setting for a rate cut, so it seems. The timing is now 31 July. At least, that is what future markets are showing.

Equity-light financial markets seem to rebound on every bit of good news. Last Friday that was a tweet from President Trump that tariffs would not be slapped on Mexican imports as Mexico yielded to US pressure regarding immigration. And because coercion seems to pay off for the USA, the next tweet targeted China saying that if during the G20 meeting in Japan later this month, Chinese President Xi refuses to meet President Trump, tariffs would be raised again on imports out of China. Will China succumb to the pressure? Of course China is not Mexico. 80% of exports out of Mexico go to the US, while Chinese exports are 18%. And by the way, Trump is now menacing French wine imports.

Exports have become a worry. Last week, the data from Germany were underwhelming. Exports for April tumbled by 3.7% month-on-month. As a result, the Bundesbank slashed its outlook for 2019 growth to 0.6%. Back in December, the central bank was still aiming for 1.6% GDP growth. Chinese exports for May bucked the trend as they rebounded in dollar-terms by 1.1% year-on-year while a decline of 3.9% was expected. From the data you can see that Chinese exports have been reoriented from the US to Europe and Japan and that the positive outcome was partly the result of pre-existing orders and a rush to get some shipments out before new tariffs were raised. Hence, it is not a given that exports will remain this strong.

All in all, the global Citi economic surprise index is approaching multi-year lows, sending a stark message to the markets.

However, the May equity market correction has sent equity risk premia back up to enticing levels, apparently too tempting to resist for some. But, at the same time, the reduction in future earnings growth continues and thus investors will need to weigh just how much they want to pay for equities in terms of absolute levels. But for now, dovish monetary policies and bearish equity positioning seem to be in the lead.