Global growth expectations lowered

Downward revisions to growth estimates in many parts of the world increase the perception that monetary policy normalization is being postponed.

By Emirates NBD Research

Markets have been relatively quiet over the last week as Chinese New Year holidays have kept investors sidelined, combined with a relative dearth of economic data. Underpinning sentiment the most, however, was the message from the Fed a fortnight ago that it will remain ‘patient’ and hinting that its tightening cycle might be coming to an end. Other central banks have also suggested more dovish outlooks, including the Bank of England, the Reserve Bank of Australia and the Reserve Bank of India which last week cut interest rates by 25bps. Combined with downward revisions to growth estimates in many parts of the world, the perception is growing that monetary policy normalization is being postponed.

A positive end to the US-China trade dispute later this month could also add to recent positive sentiment. Investors appear hopeful that the current ‘ceasefire’ in the trade war can be extended beyond the 1st March deadline when US tariffs on USD200bn of Chinese imports are due to be increased to 25% from 10%. Trade talks between the two sides will resume in Beijing this week, less than three weeks before the current ‘truce’ expires.

With the Chinese Purchasing Manager’s data pointing towards recession the markets need to see a resolution to this issue in order to prevent a more dramatic decline in business confidence. In the short term they probably also need to see a successful outcome from the US bi-partisan Congressional committee talks on border security, in order that another US government shutdown can be avoided. The temporary funding deal is due to expire on Friday of this week and the outcome will depend on whether President Trump will accept the recommendations of the committee. The Democrats are unlikely to agree to fund Trump’s border wall which, given Trump’s recent comments would suggest a new shutdown could still be on its way. US December retail sales, which were delayed by the last shutdown will be the data highlight of the week, alongside data on inflation and industrial production.