Updated: Mar 11
On Top of the Radar
Analysts and strategists from major research shops now see a greater disruption to US GDP growth from escalating trade war. Bloomberg Consensus Q3 2019 US Real GDP forecast is down 0.1% to 1.8% from prior survey. Events over the past few days represent another significant escalation in the US-China trade conflict. On 08/23, Chinese policymakers announced retaliatory tariffs against the August 1st announcement by President Trump, just to be met with an immediate response on that same day that the US would impose additional tariffs on imports. This represents a further escalation on the trade conflict and supports a consensus view that a deal is unlikely to be reached in the near term.
Sunday, 09/01/19, marked the latest escalation in a trade war that’s inflicting damage across the world economy. The 15% US duty hit consumer goods ranging from footwear and apparel to home textiles and certain tech products like the Apple Watch. A separate batch of about US$160.0 billion in Chinese goods – including laptops and cellphones – will be hit with 15% tariffs on Dec. 15, 2019. Business group are calling for a tariff truce and the resumption of negotiations between the worlds’ two-largest economies.
While Trump has defended his tariff measures, many companies and economists say that US importers bear the costs, which ultimately is passed on to consumers. Earlier in August, the Congressional Budget Office projected that by 2020, Trump’s tariffs and trade war will reduce the level of real US GDP by about 0.3% and reduce average real household income by $580.
Under the Radar
How Long the Stock-Bond Disconnect Will Last?
Between growth uncertainty, inflation disappointments and dovish central banks, the typical correlation between equities and bonds—that sees equities fall when bond yields decline—has broken down; this disconnect started to show up under our radar. In our views, the efficacy of further monetary policy easing, together with other political and geopolitical facts, will at some point have a negative impact on global economic growth and capital markets conditions.
The recent S&P500 all time high and UST 10-yr yields at multi-year lows on the expectation of further Fed rate cuts, started to get the attention of various market participants. Although equity markets have retraced a bit from the fresh highs, a question remains: Is the bond market just more worried about growth than the equity market? On the surface, the disconnect seems to be easily explained through the present value math: as the discount rate of cashflow declines (yields lower), the PV of those cashflow increases. If that is everything, then there is nothing to worry about this disconnect.
On the other hand, the recent fundamental deterioration supporting the Fed’s dovish shift, the expected limited effectiveness of monetary policy (there is just so much to go before the zero bound level) at the same time that we are deep in the business cycle, political polarity and populism are on the rise, and geopolitical risks are growing, suggest a risky environment for growth and assets ahead. We are increasingly looking to upgrade our portfolio positioning towards more defensive names, value and low volatility positions.