- Markets positioning for re-acceleration in growth
- US and China to gain speed in coming quarters
- Upward pressure on yields from recovery and bottom in inflation
- EUR/USD has peaked
Risk assets have had a couple of good weeks with stock markets making new highs in Europe and US and Emerging Markets stocks rallying further. Peripheral bond spreads also continued the gradual tightening and currencies such as the Turkish lira and the Indian rupee have strengthened. Following economic weakness in the US and China early this year, markets are now regaining optimism that the global economy will re-accelerate going into the second half of 2014. Geopolitical risks from the situation in Ukraine have also calmed down. We broadly share the overall positive view of the global economy once we are past the current bump in the road.
In the US growth is likely to recover in Q2 and further in H2. While we believe the first half of this year may undershoot consensus expectations (we look for 2% growth on average), we share the view that growth is likely to go higher from here and strengthen to a 3% pace in H2. Growth is currently weighed down by temporary factors such as higher gasoline prices, last years’ rise in mortgage rates, bad weather in Q1 and high inventories. These effects will gradually fade, though, and underlying fundamentals of rising wealth, improved real wage growth, strengthening job market and lower political uncertainty will lift growth. This week we saw more signs that activity is rising again as ISM manufacturing rose for the second month in a row and comments in the ISM report were generally upbeat, see Flash Comment – US ISM rise less than expected but comments are upbeat. Car sales for March also rebounded strongly to the highest level since 2007 following a couple of weak months.
Optimism about the euro recovery was underpinned by robust PMI data for Spain this week. Spanish composite PMI rebounded in March following two months of decline and points to 1.5-2.0% annualised growth – the strongest performance since the financial crisis hit in 2008. Spanish consumers are the most upbeat in 10 years and will likely drive a domestically driven recovery. Euro retail sales for February surprised to the upside and PMI for the eurozone points to 2% annualised growth in Q1, slightly above current consensus estimates. We remain confident in our above-consensus growth forecast for 2014 at 1.3% (consensus 1.1% recently lifted from 1.0%).
In China the government this week revealed a mini-stimulus package to lift growth from the recent weak levels. The package includes tax cuts to small businesses and an increase in railway investment. The government seems determined to reach its 7.5% growth target for this year and has plenty of flexibility with inflation at subdued levels at 2% and the housing market having cooled down again recently. The reaction from the government is in line with the response seen last year when a very similar mini-stimulus package was announced in July at a point where HSBC PMI manufacturing had also hit levels around 48.0. Last year the timing of the package coincided with the bottom in PMI and we see an increasing likelihood that PMI will bottom soon, see Flash Comment – China: Government announces mini-stimulus.
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