“Yes! There will be growth in the spring!” – Chance the gardener

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The debate over global growth continued the week of 27 April 2016 against a backdrop of mildly supportive U.S. economic data, firmer oil and commodity prices and rising equity markets.

Markets widely anticipated there would be no cuts in oil production resulting from the talks in Doha. After an initial drop on news that the OPEC meeting had failed to reach an agreement on freezing production, oil prices actually moved higher on the week. Risk assets responded positively with U.S. equity markets making highs for the year on Wednesday and corporate credit spreads tightening on the week.

The ECB met on 21 April 2016 and much as anticipated announced no change in the deposit rate at -0.4% and no change in the rate of bond purchases at EUR 80 billion per month. Further details emerged regarding the asset purchase program with corporate bond buying scheduled to start in June, and it will include debt issued by corporations in the euro area whose ultimate parent is not based in the euro area. The ECB statement had an optimistic tone citing the positive impact monetary policy is having on financing conditions and employment but was grounded in its assessment that risks to the euro area growth outlook remained tilted to the downside. Inflation is currently 0.0% and could turn negative in the next few months before recovering in 2017 and 2018.

Forecasts for U.S. first quarter GDP growth due out on Friday have also been coming down following last week’s weaker than expected retail sales (-0.3% month-on-month) and industrial production numbers (-0.6% month-on-month). The Bloomberg consensus estimate for first quarter GDP now stands at an anemic 0.7%. Forecasts for global growth have also been coming down. The IMF recently revised its growth estimate for the global economy in 2016 to 3.2% down 0.2 from where it saw things just three months ago. Outlook downgrades were broad based and hinted that the newer projections could still prove too optimistic.

The reasons for pessimism and risks to growth are well documented and well known to investors. Concerns, to name a few, include the volatility in oil and commodity prices, a slowdown in China coupled with a potential real estate bubble, declining corporate profitability and an increasing likelihood of credit defaults, the UK’s Brexit vote in June and ongoing worries about Greece.

Is it at all possible that markets and forecasters have gotten too negative with their outlooks? Are there any potential bright spots where things could surprise us to the upside? Is there hope that Chance the Gardener is right? Will there will be growth in the spring? Of course.

There are a number of reasons for optimism. Globally, central banks are injecting stimulus and surveys of economic activity in a number of economies have firmed. Here in the U.S. the employment picture has certainly been a bright spot. Non-farm payroll growth was 215,000 in March and the twelve month rolling average for job growth has been above 200,000 for two years. This week’s initial unemployment claims were 247,000, the lowest since 1973. US housing also has the potential to be a bright spot. Exhibit 1 shows the Mortgage Banker’ Association survey for home purchase applications. The series has been on an upward trend since early 2015 and is near the highs for the year. Finally, the Fed meets this week and we expect no change in the policy rate. The more dovish posture from the Fed in recent weeks has supported risk assets and we expect that to continue in the near term. In the spring, there will be growth.

Exhibit 1: Mortgage Banker’s Association US purchase index

US purchase index

Source: Bloomberg, as at 25 April 2016.

John Carey

CFA, Head of structured securities, FFTW

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