Torsten Slok, Chief Economist at Deutsche Bank Securities, concisely articulates the macro drivers impacting the markets today and the things to watch in 2020.
• Slok opens on the trade war begun in mid-2018. It has led to significant CAPEX slowing down, meaning new business equipment, instruments, software, and computers, etc.
• Secondly, CEOs’ confidence levels are their lowest since the 2008 crisis. Slok thinks this could worsen if the 2020 election uncertainty heightens. Even though business investment spending is a small share of GDP, the underlying behaviour of these factors is a major downside risk to the outlook.
• Slok points out yield hunting made a comeback this year because of three FED rate cuts (75 basis points). As a result, risky assets performed well in 2019.
• He highlights that we are in a late-cycle environment for two reasons. First, profit as % of GDP is falling (led by wage cost rising). Second, the credit quality of both consumer and corporate has marginally deteriorated – interest on auto loans has risen and credit spreads in corporate bonds have increased to 5% (CCC vs AAA). Some delinquencies are seen in the lower spectrum.
• Slok is also monitoring the developments in the repo market, which is now at 4%, however, he predicts no significant macro repercussions.
• For Slok, the economy will see a fiscal boost following the 2020 election (regardless of whether Trump or a Democratic candidate wins). This, in turn, will extend the business cycle.
Why does it matter? The cycle might continue its record longest run of growth experienced over the last 126 months, however, it does seem there are more downside risks than upside tailwinds: the trade war, the US election, consumer credit vulnerability, and liquidity tension in the repo market. These warrant cautious asset allocation for investors.
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