Outlook for economy recovers only slowly

Erste Group
By May 11, 2019 04:05

Outlook for economy recovers only slowly

Week Ahead Focus: New Yield Forecasts 

On interest rate markets, concerns about an economic slowdown that goes beyond its current magnitude continue to prevail. Sentiment and risks, rather than available data, are crucial. In fact, first quarter GDP growth in both the Eurozone and the US exceeded market expectations. 

Our forecasts had been based on a brightening of sentiment. The main reasons for this were the avoidance of hard Brexit, progress or agreement in the negotiations between the US and China and, ultimately, better economic data as a result. Some of these assumptions have come true, but the markets remain concerned. Both US and German 10y government bond yields are close to this year's lows. It is therefore time for us to correct our expectations.

The postponement of the Brexit decision only led to a relatively brief reaction from the markets, which was probably due to the fact that the issue could become acute again in the autumn. In fact, little progress has been made since. A solution is therefore not in sight and it is to be feared that activity will only become hectic again shortly before the deadline at the end of October is reached. However, we remain of the opinion that hard Brexit should ultimately be avoided, which is the most important thing from the point of view of the economy and thus the markets. After the prospect of imminent agreement, negotiations between China and the US suffered a significant setback with the increase in US tariffs and the prospect of further tariffs. The outcome is completely open. We assume that the recent increase in US tariffs is part of the negotiating strategy and that a solution will be found in the coming weeks. But the risk of escalation has certainly increased. Finally, we turn to market sentiment. Obviously the market is asking for more data to look to the future with more confidence. We expect stable growth for the Eurozone in the coming quarters. This should remove fears of a further downturn from the market, but not more. In the US, growth should slow down somewhat in the coming quarters as the effects of the tax cuts diminish. However, this slowdown starts from a high level and the US economy should therefore still achieve growth above its long-term potential. Overall, we remain more confident about the future than the markets. At the same time, however, the risks are considerable, not least because they depend on political decisions. From the current low level, however, we are more likely to see a brightening of sentiment. For our yield forecasts for Germany and the US, this still means an increase in yields ahead, although at a slower pace than originally assumed. 

 

 

Erste Group
By May 11, 2019 04:05

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