What Is Happening to Global Growth?
Investors are being wrong-footed by weaker than expected data
By Richard Barley
NO REBOUND
IHS Markit composite eurozone purchasing managers index
Source: FactSet
The soft patch in the global economy is looking more soft and less like a patch.
Wednesday’s flash purchasing managers indexes for the eurozone and Japan showed fresh declines. The eurozone composite index fell to 54.1, compiler IHS Markit said, an 18-month low and weaker than forecast; in Germany business confidence about the outlook slipped to its lowest since November 2016.
The numbers are the latest test of the consensus view that slower growth outside the U.S. in the first quarter was just a soft patch. Instead of playing catch-up to positive economic surprises as they did throughout 2017, investors are being wrong-footed by weaker than expected data.
TURNAROUND
ICE BofAML U.S. dollar index
Source: FactSet
The level of the PMIs is not the concern: they still point to growth. But coupled with concerns about trade wars and renewed political risk, the downward trend is turning winning trades into losers. One by one, starting with the big drop in stocks at the end of January, trades betting on a continuation of the trends from 2017 have fallen by the wayside.
EMERGING TROUBLE
Total returns on emerging-market local-currency bonds in dollar terms
Source: Bloomberg
Barclays index via FactSet
The most significant surprise move is in the dollar, which has reversed after falling throughout 2017, and is now up nearly 2% this year on ICE’s index. Emerging-market bonds and stocks that were flying high have been hit; a Bloomberg Barclays index of local-currency emerging-market government bonds has fallen 5.7% this quarter in dollar terms. Italy’s political ructions have turned a gain of 2.8% for the country’s bonds at the start of May into a near-1% decline, ICE BofAML indexes show. Traditional haven bonds haven’t eased the pain, with U.S. Treasurys selling off and ultralow yields in Japan and Europe providing little cushion.
All of this likely makes the market more sensitive to bad news. For instance, higher oil prices are starting to be seen as a problem for growth and inflation, rather than a sign of underlying demand. A further rise in the dollar could create even greater pressure on emerging markets by tightening global financial conditions.
The consolation for investors is that economies are still healthy and growth in the U.S. has remained strong. That may yet create opportunities in now cheaper stocks and bonds. But if slowing growth tips more toward contraction, markets have further to fall.
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