Newell Palmer: Monthly Economic Notes – November 2019

 

Newell Palmer: Monthly Economic Notes – November 2019

Economic Overview

The two main developments in the past month are:

1. More strident commentary from the IMF and central banks that monetary policy (whether adopting low interest rates or quantitative easing policies) are becoming less effective to support economic growth as interest rates are already very low, and that fiscal policy (via increased government spending and lower taxes) will have to step in. However, most governments have been reluctant to adopt looser fiscal policies to-date, but this may change in the coming year.

2. Growing realisation in the US and China that the ongoing trade dispute and escalating tariffs are impacting the US and Chinese economies, with signs that tariffs may be wound back and a trade agreement could be signed.

Monthly-Notes-November-20191.pdf

Newell Palmer: Monthly Economic Notes – October 2019

Newell Palmer: Monthly Economic Notes – October 2019

Economic Overview

Globally, we have seen weak economic growth, and increasing fears of a slowdown or a possible recession in the next few years.  As such, central banks have taken action to support the economic expansion by reducing interest rates.  With European, Japanese and Australian interest rates at either negative yields or very low yields, central banks have reached the limits of conventional monetary policy.  This leaves them with unconventional monetary policy such as quantitative easing (i.e. buying bonds) to further reduce long-term interest rates.  Increasingly, central banks have now said that it is up to governments to start introducing fiscal stimulus, e.g. tax cuts or increased government spending, to complement monetary policy.  Among the major developed economies, only the US has a positive nominal interest rate at 1.8%, but as the US Federal Reserve continues to reduce interest rates, a fiscal policy response may also be required in the US if the economy deteriorates.

Monthly-Notes-October-20191.pdf

Newell Palmer: Monthly Economic Notes – September 2019

Newell Palmer: Monthly Economic Notes – September 2019

Economic Overview

The underlying fundamentals for the global economy remain solid, reflecting tight global jobs markets, low inflation and very low interest rates. However, China’s new more aggressive negotiating position would portend further escalation in the US-China trade dispute, challenging the ability of the global economy to stabilise this year.  Recent data suggest growth in the world economy slowed significantly in Q2 to 3.3% from its 4.3% pace just a year ago. The slowdown has been relatively evenly spread across both advanced and developing economies.  Global growth remains well supported by historically ’easy’ monetary policy and near-universally tight jobs markets. The US consumer remains robust, China is amid renewed stimulus and domestic growth in Europe and Japan is solid. Australia has likely passed the worst of its housing crisis and recent business investment plans are holding up well.  However the risks have increased that the cacophony of geo-political noise could sufficiently crush global business confidence and capex plans, so as to undermine the otherwise strong jobs and consumer sectors that are currently supporting growth and company earnings across the world.

Monthly-Notes-September-2019.pdf

 

Newell Palmer: Monthly Economic Notes – August 2019

Newell Palmer: Monthly Economic Notes – August 2019

Economic Overview

Is secular stagnation a possibility in the coming years?  It is about a persistent downturn that does not respond to easy money.  In 2013, the former US Treasury Secretary Larry Summers speculated that the real interest rate at which savers and borrowers would agree to exchange funds may have been falling for decades and even turned negative.  This complicated the task of central banks, who could not push interest rates too far below zero without destroying banks’ profitability and fanning asset bubbles.  However, without meaningful inflation, real rates under secular stagnation would, even with zero or slightly negative nominal rates, stay higher than what borrowers could afford, stifling productive investment.  Without aggressive fiscal policy, the economy could remain stuck in a low-rate, slow-growth rut.

Monthly-Notes-August-2019.pdf

Newell Palmer: Monthly Economic Notes – July 2019

Newell Palmer: Monthly Economic Notes – July 2019

Economic Overview

The consensus is that we are currently in a late cycle environment with risks elevated, but also with the potential for markets to further rally. The risks include the inverted yield curve signalling a potential recession in the next two years, trade war uncertainty and weakness in global growth. However, with major central banks across the world currently easing, more China stimulus and the potential of a US-China trade deal, these factors could trigger a rally in markets. There is a risk of a “melt-up”, i.e. strong rally, in equity markets as central banks continue to reduce interest rates. But the economic background is weakening with lower growth. Thus, caution is warranted at this stage of the cycle, but to recognise that growth assets can continue to perform in the short term.

Monthly-Notes-July-2019.pdf

Newell Palmer: Monthly Economic Notes – June 2019

Newell Palmer: Monthly Economic Notes – June 2019

Economic Overview

Trade wars, whether between US and China or US and Mexico, can be unsettling to markets. However, taking a step back, the fundamentals are still positive with good economic growth in the US and China, and low unemployment in the US. The current economic expansion is the longest since the second world war, but economic cycles do not end because of old age. The two factors to watch that may indicate an end of the economic cycle are a period of synchronised monetary tightening and a major misallocation of capital, but these signals are not flashing amber. Previous cycles ended in 2008 and 2000 with a synchronous tightening of monetary policy by major central banks. At this time, there is no synchronous monetary tightening and some central banks are either loosening policy or indicating that they may loosen policy. Whilst there is increasing leverage in the US corporate sector and Chinese State-Owned Enterprises, these levels are not as high as previous cycles.
Monthly-Notes-November-20191.pdf

Newell Palmer: Monthly Economic Notes – May 2019

Newell Palmer: Monthly Economic Notes – May 2019

Economic Overview
A slowing, but still growing world economy and patient central bankers are supportive of growth assets. A reduction in geopolitical risk has also served to boost market sentiment. The rally in growth assets in the first four months of this year was a snapback from fears in late 2018 of an imminent economic slowdown and hawkish US Fed rhetoric. Since then the US Fed has made a dovish pivot and markets have rallied. However, the path forward from here for markets has various risks that can bring the market lower. These risks include the path of global growth and geopolitical risks.

Monthly-Notes-November-20191.pdf

 

Newell Palmer: Monthly Economic Notes – April 2019

Newell Palmer: Monthly Economic Notes – April 2019

Economic Overview
There are many ways to define an inverted yield curve, but one measure inverted in late March 2019, when you can earn more by buying a 3-month US Treasury note than a 10-year one. This economic gauge has recently received wide attention because an inverted yield curve has occurred prior to each of the last five US recessions. The last time the curve inverted was in early 2006 in the lead-up to the onset of recession late the next year.

Monthly-Notes-November-20191.pdf

Newell Palmer: Monthly Economic Notes – March 2019

Newell Palmer: Monthly Economic Notes – March 2019

Economic Overview
In January, the US Federal Reserve put on hold its previously flagged program of interest rate rises and quantitative tightening. The European Central Bank has laid the groundwork for doing the same. The RBA has similarly signalled the possibility of interest rate cuts. The markets liked it and equity markets have rallied since January. The standard narrative is that having dealt with the GFC, central banks are trying to stimulate growth via low rates while flooding the interbank market with liquidity. This will force greater investment in risky assets, reflating the economy. Normalisation will proceed once this is achieved.

Monthly-Notes-November-20191.pdf

Newell Palmer: Monthly Economic Notes – February 2019

Newell Palmer: Monthly Economic Notes – February 2019

Economic Overview
Last year, there was a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of 2018. The increase in volatility was the result of a number of factors including:
 increased geopolitical tensions, primarily in the form of protectionist measures by the US with its key economic partners China and Europe,
 a normalisation of interest rates in the US,
 tightening of liquidity

Monthly-Notes-November-20191.pdf