A More Aggressive ECB Could Spark A Synchronized Global Recovery
The S&P500 moved to within 0.65% of its all-time highs on Tuesday after the start of earnings season on Wall Street. Sentiment was bullish after Goldman Sachs, JPMorgan Chase and United Health group reported better results than analysts’ expectations. However the technology sector underperformed after IBM missed revenue estimates.
Economic data remained mixed after industrial production declined for the fifth time in nine months but overall building permits suggested resilience in the sector even if housing starts were below estimates.
Across the pond, the German DAX rose by over 1% but GDP growth for Germany for 2020 was lowered to 1% from 1.5%. The estimate for the current year is a modest 0.5% due to trade conflicts and Brexit uncertainties. The IMF also lowered global growth for 2019 to 3% from 3.2% citing a drag from trade tensions.
Mrs. Lagarde, the incoming ECB President, will face the resurgent threat of declining inflation expectations based on data from the survey of professional forecasters (chart above). The ECB did announce a large scale asset purchase program of EUR 20 billion a month as from November but this is insufficient to boost growth decisively. For comparison purposes, the ECB monthly purchases when faced with the threat of deflation in 2016 was EUR 80 billion a month. Addressing the issue of a lack of securities to buy which is the main cause of the low volume will be key if the ECB wants to prolong the business cycle. In the UK, there seems to be no consensus in parliament on the Brexit agreement secured by Prime Minister Johnson last Friday.
It is therefore likely that we are moving towards an extension of the October 31st deadline. In Asia, Chinese manufacturing PMI should show continued signs of bottoming but a sustained recovery is not yet apparent.
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21 October 2019
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