AG Macro Brief - 13 Feb 2020
#JeromePowell, #Fed, #Dow, #DonaldTrump, #ECB, #China, #coronavirus
Jerome Powell went through a painful testimony to the Congress on the state of the economy on Tuesday and Wednesday. Trump was looking for an excuse to use him as a punching bag as the Dow dropped 100 points while Powell was speaking. It is become almost comical that Trump thinks that the strength of the equity markets is something he can use to leverage and increase deficits in other areas. Powell is so used to Trump’s theatrics that he cares a darn.
So what was the message from Powell? Nothing has changed. The economy is good and inflation tame, but they are ready to act against any changes to that view.
What could really rock the boat? The old risk was an indefinite trade war. While that is put very much under control, the new risk is the unknown outcome of the coronavirus. The former had already forced the Fed and the ECB back into balance sheet expansion. And the latter has the central bank of China, flooding China and global markets with liquidity.
Central banks have always used low rates, balance sheet expansion and credit creation to stimulate growth. The Fed has been at the forefront of this strategy. This has translated into hiring, spending and investing, which has turned into positive economic activity, all despite a list of threatening crises .
So, currently we have record high stocks, a strong housing market and solid economic data. This is a powerful line of defense against a reduction in global growth from the health crisis in China. But the market is pricing in more fed cuts. There is a 50- 50 chance of a cut in July and an almost 80 % chance of a cut in Dec.
This is sending a message to the market that the coronavirus is likely to turn into a global pandemic (which if it does means the market is too conservative on the cuts) or the market is thinking the economy is no better than what we have seen so far in the past decade.
The market is leaning very much to one side. If there is a quick solution to the health crisis in China in the coming weeks or should the death count peak out soon, the economy should be positioned for an upside growth for at least a few months. The Fed’s position should soon turn to be worrying about inflation again.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.