The global macroeconomic situation continues to show signs of weakness. Global PMIs and investments have experienced a setback amid uncertainty about trade relations between the US and China and market-based inflation expectations have plummeted. We expect renewed weakness in China in Q3, which will reverberate in the rest of the world given that China pulls one-third of global growth. The expected recovery in Europe is likely to be postponed until we see a trade deal and recovery in China later this year, while the US economy is showing weakness amid the trade uncertainty. We expect a modest rebound in the global economy at the end of the year on the back of a trade deal between China and the US and easing of monetary policies in advanced economies.
Central banks in the euro area and the US have lately signalled a readiness to mitigate the economic weakness. ECB's Mario Draghi suggested a dovish change in policy at the ECB Forum in Sintra mid-June. Here he struck a very dovish tone saying that 'in the coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability'. We have changed our forecast and now look for the ECB to cut rates by 20bp, introduce a tiering system for interest rates, extend forward guidance and restart quantitative easing (QE). This could happen in September, see ECB Research: New ECB call - rate cut and restart of QE , 18 June 2019.
The Fed has also prepared the market for easier monetary policy. At its last meeting, the Fed removed that it was 'patient' and said 'the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion'. It also stated that uncertainties had increased (for more details see FOMC review - The Fed as dovish as it could be without cutting rates , 20 June 2019). We expect a 25bp rate cut in July followed by two additional 25bp rate cuts in H2.
At the G20 meeting in Tokyo late June, the US and China struck a ceasefire deal after the latest escalation in early May. The two sides agreed to restart their trade talks, while the US pledged not to raise tariffs on the remaining USD300bn of imports from China. The deal does not set a deadline for the talks, as was the case in December. The export ban on Huawei was also lifted, at least partially. While the ceasefire is good news in the sense that it confirms that both sides want to make a trade deal, big obstacles remain to reach a deal that satisfies both sides and we still see a rocky path ahead. We expect the two sides to reach a deal toward the end of the year, as it will be critical in our view for US president Trump's presidential election campaign.
While financial markets welcome the latest trade ceasefire, it will not be a game changer . Bond yields have fallen sharply over the past months, as markets have priced in policy easing by the Fed and respond to the outlook of weaker growth and lower inflation. We look for yields to stay subdued. Equities are perhaps the asset class most exposed to the trade war. In that regard, the ceasefire is a positive. However, with trade uncertainty lingering and weak global macroeconomic momentum, equity markets are expected to experience considerable volatility over the coming months. In FX markets, the lower probability of new US tariffs on China is negative for the USD, but a mitigating factor is that the odds that the Fed will cut by 50bp in July are likely to go down, which would be USD positive.
Macro charts overview
