William De Vijlder

Group Chief Economist BNP Paribas

Softer growth amid increased uncertainty

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investor risk appetite

A sudden drop in risk appetite

The eruption of US equity market volatility, with global spillover effects, is a delayed reaction to a rather significant increase in bond yields since the second part of August. Market-implied inflation expectations didn’t move that much so the rise in long term rates reflects an increase in real yields which in turn is related to strong growth numbers. Historically the relationship between weekly changes in yields and stock market performance is weak. This implies that one should focus on drivers of investor risk appetite and in particular signs of slower growth.

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Federal Reserve

United States: Data-dependent discomfort

Recent indicators point towards ongoing strong US growth. The non-manufacturing ISM index has caused a jump in treasury yields: data-dependent forward guidance implies that investors expect the Fed will not remain passive when data are particularly strong. Growth outside the US is slowing yet higher US yields have been mimicked across the globe. The dollar has also strengthened which is unwelcome news for corporates in developing economies which carry a lot of debt in USD.

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Fed: the Phillips curve is flat

Fed chairman Jerome Powell made important comments during his press conference. Fiscal policy is on an unsustainable path and lasting widespread tariffs would be bad for the US and the world. Monetary policy remains accommodative and data-dependent. Markets liked the dovish bias in the message.

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lightning

Ten years after: The uncomfortable new normal

Ten years after the collapse of Lehman Brothers, assessing to what extent major economies have fully recovered from the ensuing global financial crisis and the Great Recession very much depends on the perspective which is chosen. A mixed picture emerges: in most countries per capita real GDP is higher than before the crisis. But public sector debt hasn’t declined and growth has been slow, despite the expansionary policy stance. Policy rates are still (very) low and central bank balance sheets are vastly bigger. Policy leeway hasn’t been restored which implies that thinking about how to address the next downturn should be high on the agenda.

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Secteur manufacturier

Global economy: Decline of manufacturing sentiment slows down

Since the end of 2017, most countries have witnessed a decline of the Markit PMI index for the manufacturing sector. The pace of decline is slowing however in the past 3 months compared to the previous 3 months. This and the still high level of the index in many countries point towards an ongoing satisfactory growth pace.

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Fed: Avoiding the risks of stargazing

In assessing its monetary policy stance, the Fed pays attention to differences between realised and target inflation, unemployment and its natural rate, the policy rate and its neutral rate. Estimates of these reference points are highly uncertain. For this reason the Fed adopts a pragmatic approach based on data-dependence and gradualism: dovishness still prevails.

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Fed building

Fed: Market considers tightening cycle is well advanced

Recent Federal Reserve research shows that the slope of the short end of the yield curve is a more reliable indicator than the commonly used difference between 10-year and 1 or 2-year US Treasury yields. In a similar vein, we can look at the difference between the forward 3-month LIBOR rate and the spot rate. This difference has increased as of late. However, the level and shape of the entire forward curve show that the market is of the view that the Fed tightening cycle is well advanced.

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Picture William De Vijlder

EcoTV Week – 07/20/2018 – The psychology of protectionism

Corporate America is increasingly confronted with the consequences of tariff increases and is concerned that more is to come. This is a reminder that protectionism influences the economy not only directly via prices or changes in supply and demand but also indirectly because of increased uncertainty.

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question mark

Emerging ambiguities

Economic prospects have become more uncertain since the beginning of the year. Will the Federal Reserve be more aggressive faced with a US economy operating at full cruising speed? Does the flattening of the yield curve foreshadow a more-severe-than-expected slowdown in 2019? What will be the consequences of higher tariffs? These ambiguities have emerged at the same time as various pressures in the emerging countries.

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blue sky

Guarded confidence

Growth assumptions for the world economy remain at a high level in 2018 underpinned by a powerful combination of job creation, rising company profits and easy access to financing. Yet sources of concern have multiplied and others have become far more intense, leading to a sentiment of increased uncertainty. This is predominantly related to politics and economic policy, which leaves room for positive surprises, but if nothing changes, it could also result in ever stronger headwinds for consumer spending, business investment and international trade

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Fed

The US yield curve: be careful what you wish for

The flattening of the US treasury curve has received a lot of attention as of late because historically recessions have been preceded by an inversion of the yield curve. A rather flat curve does not imply that a recession is imminent. However, historically once the yield curve starts to steepen after having flattened or inverted, a recession follows quite soon thereafter. Rather than focussing on the slope of the curve, one should wonder when the Fed will stop tightening.

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weather

Conflicting perspectives raise eyebrows

Speculative positioning in VIX futures shows investors expect volatility to remain low, which implies an absence of growth or inflation shocks. The flattening of the US yield curve shows investors expect slower growth. These conflicting views may reflect differences in investment horizon but in the end, only one of the two can get it right, which is a source of concern.

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interrogations

The transformation of uncertainty

Since the beginning of the year the financial markets and the global economy have reacted to various sources which is inherent, at least in part, in a market economy. We must constantly ask ourselves where the next bit of bad news might spring from, and also keep in mind that better visibility in one area is a reminder to search for other sources of uncertainty elsewhere.

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doute

Global: (un)avoidable uncertainty

Uncertainty has a big impact on the behaviour of households and companies. Unexpected events and their second round effects imply that to some extent it is unavoidable. Economic policy should avoid increasing it further. Whereas monetary policy aims to keep a lid on uncertainty, protectionist measures amplify it and can end up acting as a major headwind to growth.

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flag Germany

Germany: still relaxed about softer sentiment

German business climate indicators have eased since the start of the year, a movement which is broad-based. Very recently, some indicators have stabilised. Corporate uncertainty, as measured by the dispersion of the assessments of the economic outlook, has not increased yet despite concern about a trade war. However, dispersion tends to lag the overall evolution of the business climate so this indicator will need to be monitored closely in the coming months.

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William De Vijlder

About William De Vijlder

Group Chief Economist BNP Paribas
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