"National wealth can only be measured through trade" John Law

The announcement from the Whitehouse that Donald Trump had no plans to meet Xin Jinping, as well as Whitehouse Chief advisor Larry Kudlow commenting that the U.S. and China were still “far away” from a trade deal, knocked stocks into the weekend. This on top of downgrades for growth expectations for the euro area, after forecasts were lowered for both Germany and Italy. Wall Street did stage something of a late rally into the end of the day, boosted by more positive earnings reports. So far, with just under 70% of the S&P 500 companies reporting, year on year earnings have grown only over 13% on average. Analysts are not so optimistic for the coming quarter, in anticipation of the impact of slower growth analysts now forecast earnings to drop by 2% year on year.

The US dollar rose on the week, more in reaction to weaker news around the rest of the globe. The Bank of England, leaving interest rates unchanged at the monthly meeting was the latest of the global central banks to paint a more dovish tone. To no great surprise blaming Brexit uncertainties. The markets now place little possibility on the Fed raising rates this year; it's looking less likely for the ECB and the Bank of England, possibly depending on the Brexit outcome.

The Federal Reserve has managed to raise interest rates as the U.S. economy strengthened over the past couple of years, helped by Trump’s tax reforms and recovery in Emerging Markets. Before this equity markets were boosted in the past decade during periods of growth concerns by central banks adding stimulus with both words and action.

The question may arise soon if economic growth does continue to slow, can they pull this trick off again? The threat of inflation seems a pretty small one at present, however, should it spike at some point, and economic growth remains anaemic this will put the global central banks in a difficult position. At present equity markets are mainly taking the view central banks can do enough to prevent the global economy from slowing into a recession.

Looking to the week ahead, earnings season is coming to an end in America, trade negotiations between China and the US continue this week. That may well be the most influential event of the week ahead. For the US economy, it’s a retail week as we get inflation data, retail sales and consumer confidence. There will also be a renewed concern the US government could shut down once again over funding for the Mexican wall. UK GDP growth for the fourth quarter will make some headlines, as will the equivalent data for the eurozone. China trade data will also receive a comment as a window on global growth.

Posted on February 10, 2019 .