Financial markets have sputtered again recently as concerns over global growth flared, in part on the back of weak purchasing managers (PMI) surveys in Germany and France, which could foreshadow a soft patch in manufacturing, and also in the face of disappointing emerging market data.
Exhibit 1: European PMIs - changing direction
(index level; value greater than 50 indicates expansion; composite if available, else manufacturing for latest month)
Source: Markit, BNP Paribas Asset Management, data as of 24 March 2019
Coming after an earlier bounce, the notable downturns in Germany, Europe’s largest economy, and France reflect renewed problems on the exports side and could signal trouble ahead for the eurozone economy (although in our view, a recession is unlikely). This has caused bond yields to fall in anticipation of an economic slowdown, although in all fairness it must be said that economic data have generally been holding up otherwise and US data can even be said to be fine.
Perhaps indicative of the (expected) slowdown, the pressure on eurozone bond yields has come from inflation expectations as well as real – inflation-adjusted – yields. That could point to a worse outlook relative to the US than was the case in the fourth quarter of 2018 when markets also sputtered. One way or another, the blend of falling real yields and falling inflation expectations is typically a bad omen for equities.
For US Treasury yields, the main factor behind their recent fall has been falling real yields. By contrast, inflation expectations have rebounded (in line with rising crude oil prices). The latter remains a prop under equities, as well as the recent, more dovish stance by the US Federal Reserve, which has signalled that benign inflation now allows for a pause in the monetary tightening cycle (and potentially a complete halt or even an interest-rate cut).
Exhibit 2: Guidance index
(positive guidance as a percentage of the total)
Source: Bloomberg, BNP Paribas Asset Management, data as at 24 March 2019.
Overall, investors might feel dazed as market indicators and signals point this way and that. The guidance given by companies on their outlook for the rest of the year as they present first-quarter results might lift the clouds, or darken existing ones. Fingers crossed that the first-quarter reporting seasons starting this week provide clarity on the direction.
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