Despite U.S. fiscal expansion, the global supply of safe assets may be nearing a cyclical peak. Large U.S. banks report record net income in Q1, helped by tax cuts and strong equity trading revenues. PBOC rate cut this week suggests a desire to ease financial conditions as corporate deleveraging continues. Foreign ownership on the rise in EM local currency bond markets
We recently introduced a new activity tracker for China. That tracker displays far more swings than the official GDP data. We explore if swings in credit are able to close the gap with official data. Credit explains in full the gap between GDP and the tracker since 2016. We conclude policymakers use credit to smooth out GDP fluctuations.
We discuss why global growth was so synchronized last year, which we trace back to the Shanghai G20 meeting in February 2016. That meeting followed a rapid Dollar rise and pronounced oil price fall, developments that caused global growth to become less synchronized. After the meeting the Fed shifted dovish and ECB and BoJ moved hawkish. These shifts produced a policy-induced resynchronization of global growth, but the days of this policy-induced resynchronization were always numbered. Mounting trade tensions are exacerbating the process of desynchronization.
The world economy expanded in a synchronized manner in 2017. Headline growth in 2018 will be on an even stronger footing, though we detect first signs of desynchronization setting in. Mounting trade tensions are one driver of desynchronization. Monetary policy normalization should remain a side show.
Short-dated rate swaps suggest a steady rise in the Fed funds rate might not be a done deal. Sentiment more pessimistic ahead of Q1 earnings; high FX debt spells headwinds for some EM currencies. Geopolitics boosting oil prices, but this should not derail benign EM inflation outlook. NAFTA deal close, yet so far away; US-China trade fears dissipate as China launches new reforms.
