A sea change in investors’ outlook for the world economy

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Bank of England (BoE) governor Mark Carney gave a concise analysis last week of how anticipations have evolved recently in financial markets. Here are the main points:

  • Global trade tensions have led to a “sea change in investors’ outlook for the world economy.
  • The sharp shift in market expectations for interest rates – particularly in the US, where investors (prior to a strong payroll report on 05/07/19) were pricing in four rate cuts by the end of 2020 – suggests “a shock to US and Chinese business confidence similar to that seen in the UK” since the Brexit vote.
  • Mr Carney considers the market’s reaction to have been “a bit extreme” (less extreme after the strong payroll data published on 05/07/19), but it reflects fears that trade tensions “could be far more pervasive, persistent and damaging than initially expected.”
  • In some jurisdictions, “the impact may warrant a near-term policy response as insurance to maintain the expansion,” said Mr Carney.
  • Although the BoE governor went on to comment that global markets were pricing in “much more stimulus than was warranted”, bond markets took his remarks positively (meaning a greater likelihood of a rate cut from the BoE later this year).

Some of the market’s confidence about the extent of future rate cuts in the US was dispelled on 05/07/19 by the news of a sharp increase in US non-farm payrolls in June (+224,000).

But, despite the strong headline gain in payrolls, all does not seem well in the US labour market. The unemployment rate rose by 0.1% due to a 0.1% bounce in the labour force participation rate. And wage growth remains flat relative to the same time last year. Earnings growth has been stuck in the 3.1%-3.4% range for the last year.

Exhibit 1: Weak US wage growth – average hourly earnings have remained stuck in the 3.1%-3.4% range for the last year

(Graph shows year-on-year, % changes in US average hourly earnings for all employees on private, non-farm payrolls from March 2007 through June 2019).

A sea change in investors' outlook for the world economy

One explanation is that there is more slack in the US labour market than thought. This and the weakness of worker bargaining power may be keeping pay and price inflation down despite the low unemployment rate. In which case full employment in the US is a long way off. If it were anywhere close, wage growth would surely be back to pre-recession levels of 4%, or even higher.

The weakness of wage growth in developed economies is a subject we will explore more in coming days.


Mr Carney also explained that the term ‘a sea change’ means a profound transformation – a change wrought by the sea. The term was originally coined by Shakespeare in The Tempest. Shakespeare used it to refer to a literal change wrought by the sea. It appears in a song sung by Ariel, to Ferdinand, a prince of Naples, after Ferdinand’s father’s apparent death by drowning: Full fathom five thy father lies, / Of his bones are coral made, / Those are pearls that were his eyes, / Nothing of him that doth fade, / but doth suffer a sea-change, / into something rich and strange, / Sea-nymphs hourly ring his knell, / Ding-dong. / Hark! now I hear them, ding-dong, bell.

To read a full version of the speech “Sea Change” given by Bank of England governor Mark Carney’s on 02/07/19, click here >

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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

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