Anyone for a free lunch?

The Federal Reserve and the ECB reaffirmed their dovish stance as the IMF lowered growth forecasts for growth in the global economy this year. They now forecast the global economy to grow at 3.3%, down from their prediction of 3.5% in January. As always, the market is ahead of the IMF, and therefore equity prices were little impacted by this change in the forecast. The minutes from the last Fed meeting reaffirmed the view that the Fed is likely to leave interest rates where they are for the coming year. Several of the members believe the current level is close to a neutral run rate, as they also forecast growth to be in line with the long run trend.

While the uncertainty of Brexit continues as Theresa May extends the period until October the UK month on month GDP estimate come in higher than expected at 0.2%. We refer to the weakness in the Citi US economic surprise index, as data on average fails to meet expectations. The opposite is currently the case for the UK economy, as a majority of economic data overall manages to meet or beat expectations.

The ECB met on Wednesday announcing the latest interest rate decision, leaving rates as they were. Pictures of the chairman making his way to the press conference appeared that of a man who is weary with the burden of office, probably grateful to pass on the baton later in the year. Single handily trying to boost the economy and just as a green shoot of recovery appears something seems to knock back growth, has taken its toll. Six months ago, Mario Draghi and fellow members of the ECB were forecasting raising interest rates later this year, analysts now predict a possible cut.

The central bankers of the world must be careful as they could, by their continual dovish stance, create the recession they so try to avoid. If consumers continue to hear cautious tones, there is a real chance that they will talk the world into one.

Equity markets have risen on the back of a global economy supported by ultra-low interest rates, ever since the financial crisis. It feels like we live in a world that of a free lunch. If growth accelerates so will risk assets if growth stagnates the central banks will step in and support risk assets. Almost as if we as equity investors believe heads we win, tails… The concern is that there is no such thing as a free lunch, and at some stage, someone will pay the price for this lunch. The uncertainty is what the price is we will pay. The next test for equity investors starts tomorrow as the first earnings season begins.

Posted on April 11, 2019 .