key global themes for 2020 - unica.it
TRANSCRIPT
Key Global Themes for 2020
Thursday, January 30 2020
Disclaimer
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH
and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data included are solely derived
from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not
share data or information with Fitch Solutions Country Risk & Industry Research.
2
Contents
1. Key Themes For 2020
2. Cyclical Stabilisation In Global Growth
1. PMI Stabilise As Policy Is Supportive
2. Trade Dynamics To Offer Support
3. US Economy Picking Up
4. Eurozone Economy Stabilising
5. German Growth To Pick Up Slightly
6. Chinese Growth Facing Downside Risks
3. Recession Risks & Vulnerabilities
1. Risks Easing slightly, But Challenges Remain
2. Late-Cycle, Capacity Constraints & Inflation
3. US-Iran Tensions & Oil Risks
4. Wuhan Coronavirus Risks To Global Growth
5. Equity Markets & Risk Assets Vulnerable
10 Key Themes For 2020
4
Theme Description Theme Description
1. 1990s Mid-Cycle Playbook
US & global economy looks similar to mid-to-late 1990s, which saw a mid-cycle adjustment. Growth to stabilise in 2020.
6. Global Consumer Story To Slow Slightly
We believe that the global consumer comes off the boil as job gains will continue to slow.
2. Recession Risks To Remain Elevated
Despite the potential for a stabilisation in cyclical indicators, there are plenty of risks and imbalances, ranging from trade to debt.
7. Rising Structural Pressures on China
China is facing an increasing number of structural pressures, which are being compounded by political & trade risks.
3. Policy Challenges & Dilemmas
Slower trend growth will exacerbate policymakers’ trade-offs and challenges. Political risk will remain an issue.
8. UK-EU Trade Deal Uncertainty Replaces Brexit Uncertainty
Trade negotiations could be difficult and uncertain and could result in a de-facto ‘hard’ Brexit.
4. Fiscal Policy To Take Over
Monetary policy is reaching its limits as interest rates have been cut to record lows, or central banks want to retain ‘fire-power’.
9. Potential For Unexpected Leadership Changes
Potential for governments to collapse in Europe (eg, Spain, Italy). Carrie Lam could resign. Trump could lose election.
5. US-China Tensions Persist, But Uncertainty Has Peaked
We see bouts of escalation and de-escalation, but most of the uncertainty is behind us as we are unlikely to see a ratcheting up in trade tensions by the same degree.
10. US Partisan Divisions To Get Worse Before They Get Better
2020 will likely see deepening political polarisation between Republicans and Democrats as both sides prepare for the November election.
Source: Fitch Solutions
Cyclical Stabilisation In Growth
2
1990s Mid-Cycle Playbook, With Global Growth Stabilising In 2020
6
Global Real GDP Growth To Stabilise%
2019 Looks Like The 1990s US Fed Rate Cutting Cycles% & Number Of Months
e/f = estimate/forecast. Source: Fitch Solutions
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2012 2013 2014 2015 2016 2017 2018 2019e 2020fSource: Bloomberg, Fitch Solutions
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
-2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
1995 (LHS) 1998 (LHS)
2019 (RHS) 2020 Forecast (RHS)
Global Growth Conditions Starting To Turn A Corner?
7
• We forecast global growth to come in at 2.7% in 2020, marking a slight uptick from the 2.6% registered in 2019.
• An increasing number of indicators point to signs of a cyclical bottoming out of the global economy.
• Global PMI composite readings have picked up from the low of 50.8 in October to 51.7 in December, with a strong pick-up in services (51.0 to 52.1) and a muted improvement in manufacturing from 49.8 to 50.1 over the same period.
• While the improvement in data is broadening, German and US manufacturing remain in contraction. Moreover, capacity constraints could limit the pace of the rebound in activity. Other risks remain in place.
Global PMIs Show Sign of Bottoming & Stronger Manufacturing Index
Source: Fitch Solutions
47
48
49
50
51
52
53
54
55
56
Jan-1
7
Ma
r-17
Ma
y-1
7
Jul-17
Sep
-17
Nov-1
7
Jan-1
8
Ma
r-18
Ma
y-1
8
Jul-18
Sep
-18
Nov-1
8
Jan-1
9
Ma
r-19
Ma
y-1
9
Jul-19
Sep
-19
Nov-1
9
Manufacturing Composite Services Threshold
Looser Fiscal & Monetary Conditions To Support Growth
8
• Over the past quarter there has been a continued move towards fiscal and monetary tightening, which will continue to support growth.
• Central banks around the world have less room to cut interest rates than they did in 2019, and we believe that on aggregate monetary policy will turn more neutral in 2020.
• Therefore, policymakers will increasingly lean on fiscal policy to support growth. We have seen this in Japan, South Korea, the US, Russia and India to name a few countries.
• This means that policy will remain accommodative over the coming months so long as inflationary pressures remain well behaved.
Fiscal & Monetary Policy Matrix
Source: Fitch Solutions
Tightening
NeutralFrance, Italy, Japan,
US
Germany, Spain,
Switzerland, UK, Saudi
Arabia
Brazil, Nigeria
Loosening
Russia, Turkey,
Australia, China, India,
South Korea, Thailand,
Argentina, Canada
Indonesia, Mexico
Key Loosening Neutral TighteningShift since three
months ago
Mon
etar
y Po
licy
Fiscal Policy
Central Bank Easing Boosted Liquidity & Lowered Borrowing Costs
9
Central Banks Still Loose On BalanceDiffusion Index
Bond Yields Still Low Globally%, Germany (RHS)
Source: BIS, Fitch Solutions Source: Bloomberg, Fitch Solutions
-15
-10
-5
0
5
10
15
Jan-1
0
Jun-1
0
Nov-1
0
Apr-
11
Sep
-11
Fe
b-1
2
Jul-1
2
Dec-1
2
Ma
y-1
3
Oct
-13
Ma
r-14
Aug
-14
Jan-1
5
Jun-1
5
Nov-1
5
Apr-
16
Sep
-16
Fe
b-1
7
Jul-1
7
Dec-1
7
Ma
y-1
8
Oct
-18
Ma
r-19
Aug
-19
Tightening
Loosening-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-1
0
1
2
3
4
5
Nov-1
4
Feb
-15
Ma
y-1
5
Aug
-15
Nov-1
5
Feb
-16
Ma
y-1
6
Aug
-16
Nov-1
6
Feb
-17
Ma
y-1
7
Aug
-17
Nov-1
7
Feb
-18
Ma
y-1
8
Aug
-18
Nov-1
8
Feb
-19
Ma
y-1
9
Aug
-19
Nov-1
9
US China Germany
Phase-One Deal Helps Global Trade Come Out Of Soft Patch
10
Exports Picking Up Slightly For Majors% chg y-o-y, 3mma
South Korean Semiconductor Exports Bottoming Out?% chg y-o-y
Note: Weighted average of major exporting markets. Source: Bloomberg, Fitch Solutions Source: Bloomberg, Fitch Solutions
-40
-20
0
20
40
60
80
Dec-1
3
Apr-
14
Aug
-14
Dec-1
4
Apr-
15
Aug
-15
Dec-1
5
Apr-
16
Aug
-16
Dec-1
6
Apr-
17
Aug
-17
Dec-1
7
Apr-
18
Aug
-18
Dec-1
8
Apr-
19
Aug
-19
Dec-1
9
-30
-20
-10
0
10
20
30
40
Ma
r-04
Nov-0
4
Jul-0
5
Ma
r-06
Nov-0
6
Jul-0
7
Ma
r-08
Nov-0
8
Jul-0
9
Ma
r-10
Nov-1
0
Jul-1
1
Ma
r-12
Nov-1
2
Jul-1
3
Ma
r-14
Nov-1
4
Jul-1
5
Ma
r-16
Nov-1
6
Jul-1
7
Ma
r-18
Nov-1
8
Jul-1
9
US Economic Activity Picking Up & Manufacturing Divergence To Ease
11
GS Activity Indicator Showing Cyclical Rebound%
PMI Divergence In The US Should Start To EaseIndex
Source: GS, Bloomberg, Fitch Solutions Source: Bloomberg, Fitch Solutions
-1
0
1
2
3
4
5
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
46
48
50
52
54
56
58
60
62
Ma
y-1
3
Sep
-13
Jan-1
4
Ma
y-1
4
Sep
-14
Jan-1
5
Ma
y-1
5
Sep
-15
Jan-1
6
Ma
y-1
6
Sep
-16
Jan-1
7
Ma
y-1
7
Sep
-17
Jan-1
8
Ma
y-1
8
Sep
-18
Jan-1
9
Ma
y-1
9
Sep
-19
Manufacturing Non-Manufacturing Composite
Asian Sentiment Indices & US Equities Could Support US Growth
12
Asia Rebound Could Signal A Boost To The US Economy Index, %
Equities Often Lead Growth Momentum% chg y-o-y
Source: Bloomberg, Fitch Solutions Source: GS, Bloomberg, Fitch Solutions
0
1
2
3
4
5
6
7
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Jan-1
2
Jun-1
2
Nov-1
2
Apr-
13
Sep
-13
Fe
b-1
4
Jul-1
4
Dec-1
4
Ma
y-1
5
Oct
-15
Ma
r-16
Aug
-16
Jan-1
7
Jun-1
7
Nov-1
7
Apr-
18
Sep
-18
Fe
b-1
9
Jul-1
9
Dec-1
9
Asia Leading Sentiment Index (8M Lead) US LEI (RHS)
-50
-40
-30
-20
-10
0
10
20
30
40
50
-3
-2
-1
0
1
2
3
4
5
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
GS US Current Activity Indicator S&P 500 (RHS)
Improving Confidence To Support Business Activity & Investment
13
Business Confidence Coming Off Its Lows In The USIndex
US Expenditure Surveys Point To Uptick In Capex CycleIndex, % chg y-o-y
Source: Bloomberg, Fitch Solutions Source: BEA, Bloomberg, Fitch Solutions
80
85
90
95
100
105
110
115
5.1
5.6
6.1
6.6
7.1
7.6
8.1
2013 2014 2015 2016 2017 2018 2019
CEO Confidence Index NFIB Small Business Optimism (RHS)
-20
-15
-10
-5
0
5
10
15
-30
-20
-10
0
10
20
30
40
50
Q100
Q400
Q301
Q202
Q103
Q403
Q304
Q205
Q106
Q406
Q307
Q208
Q109
Q409
Q310
Q211
Q112
Q412
Q313
Q214
Q115
Q415
Q316
Q217
Q118
Q418
Q319
Philly Fed: 6M Forecast Cap. Expenditure 2Q Lead
US GDP Gross Private Domestic Investment (RHS)
Falling Mortgage Rates Helping To Spur US Residential Market
14
Bond Yields & Mortgage Financing Costs Falling%
NAHB Survey Shows Strong Residential MarketIndex
Source: Bloomberg, Fitch Solutions Source: NAHB, Bloomberg, Fitch Solutions
27
37
47
57
67
77
87
2012 2013 2014 2015 2016 2017 2018 2019
Present Sales Future SalesMarket Index Prospective Buyer Traffic
1.8
2.3
2.8
3.3
3.8
4.3
4.8
Nov-1
4
Fe
b-1
5
Ma
y-1
5
Aug
-15
Nov-1
5
Fe
b-1
6
Ma
y-1
6
Aug
-16
Nov-1
6
Fe
b-1
7
Ma
y-1
7
Aug
-17
Nov-1
7
Fe
b-1
8
Ma
y-1
8
Aug
-18
Nov-1
8
Fe
b-1
9
Ma
y-1
9
Aug
-19
Nov-1
9
US 30 Year Yield Bankrate.com US Home Mortgage
Eurozone: Finding Some Stability
15
• Following a sharp deceleration since late 2017, composite PMI readings in the Eurozone are stabilizing, and in some cases such as the UK, Germany and Spain are picking up.
• This suggests that the Eurozone should find some stability in 2020, and we forecast growth of 1.2% this year, similar to our estimate for 2019.
• However, there remains a significant divergence between services and manufacturing, which will have to be narrowed if the EZ is to stabilize.
• Services are in expansion and are rising in Spain, Germany and the UK.
• Manufacturing, however remains in contraction except for in France, but is bottoming.
Composite PMIs Showing Improved ResilienceIndex
Source: Markit, Bloomberg, Fitch Solutions
45
47
49
51
53
55
57
59
61
63
Jan-1
7
Ma
r-17
Ma
y-1
7
Jul-17
Sep
-17
Nov-1
7
Jan-1
8
Ma
r-18
Ma
y-1
8
Jul-18
Sep
-18
Nov-1
8
Jan-1
9
Ma
r-19
Ma
y-1
9
Jul-19
Sep
-19
Nov-1
9
Jan-2
0
EZ Italy Germany France Spain UK
Services-Manufacturing Divergence, But Manufacturing Is Bottoming
16
Service Expansion & Picking Up In Spain, Germany & UKIndex
Manufacturing Contraction Bottoming Out?Index
Source: Bloomberg, Fitch Solutions Source: Bloomberg, Fitch Solutions
45
47
49
51
53
55
57
59
61
63
Jan-1
7
Ma
r-17
Ma
y-1
7
Jul-17
Sep
-17
Nov-1
7
Jan-1
8
Ma
r-18
Ma
y-1
8
Jul-18
Sep
-18
Nov-1
8
Jan-1
9
Ma
r-19
Ma
y-1
9
Jul-19
Sep
-19
Nov-1
9
Jan-2
0
EZ Germany France Italy Spain UK
40
45
50
55
60
65
Jan-1
7
Ma
r-17
Ma
y-1
7
Jul-17
Sep
-17
Nov-1
7
Jan-1
8
Ma
r-18
Ma
y-1
8
Jul-18
Sep
-18
Nov-1
8
Jan-1
9
Ma
r-19
Ma
y-1
9
Jul-19
Sep
-19
Nov-1
9
Jan-2
0
EZ Spain Italy France Germany UK
German Manufacturing & Auto Sectors Improving
17
Manufacturing Bottoming Out As Services AccelerateIndex
IFO Manufacturing Surveys Point To Output RecoveryIndex, %
Source: Bloomberg, Fitch Solutions Source: IFO, Bloomberg, Fitch Solutions
40
45
50
55
60
65
Jan-1
7
Ma
r-17
Ma
y-1
7
Jul-17
Sep
-17
Nov-1
7
Jan-1
8
Ma
r-18
Ma
y-1
8
Jul-18
Sep
-18
Nov-1
8
Jan-1
9
Ma
r-19
Ma
y-1
9
Jul-19
Sep
-19
Nov-1
9
Jan-2
0
Composite Services Manufacturing
-6
-4
-2
0
2
4
6
8
-20
-15
-10
-5
0
5
10
15
20
25
30
Jan-1
2
Ma
y-1
2
Sep
-12
Jan-1
3
Ma
y-1
3
Sep
-13
Jan-1
4
Ma
y-1
4
Sep
-14
Jan-1
5
Ma
y-1
5
Sep
-15
Jan-1
6
Ma
y-1
6
Sep
-16
Jan-1
7
Ma
y-1
7
Sep
-17
Jan-1
8
Ma
y-1
8
Sep
-18
Jan-1
9
Ma
y-1
9
Sep
-19
Jan-2
0
Export Expectations Business Expectations
Industrial Production (RHS)
German-China Auto Connection Improving
18
German & Chinese Economies Tied At The Hip% chg y-o-y, 3mma
Potential Upside Surprise For German Exports%
Source: Bloomberg, Fitch Solutions Source: Bloomberg, Fitch Solutions
-30
-20
-10
0
10
20
30
40
Ma
r-15
Jun-1
5
Sep
-15
Dec-1
5
Ma
r-16
Jun-1
6
Sep
-16
Dec-1
6
Ma
r-17
Jun-1
7
Sep
-17
Dec-1
7
Ma
r-18
Jun-1
8
Sep
-18
Dec-1
8
Ma
r-19
Jun-1
9
Sep
-19
Chinese Car Production German Car Exports
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
-5%
0%
5%
10%
15%
20%
25%
Jan-1
1
Jul-1
1
Jan-1
2
Jul-1
2
Jan-1
3
Jul-1
3
Jan-1
4
Jul-1
4
Jan-1
5
Jul-1
5
Jan-1
6
Jul-1
6
Jan-1
7
Jul-1
7
Jan-1
8
Jul-1
8
Jan-1
9
Jul-1
9
Jan-2
0
Jul-2
0
Exports 3MMA YoY Vehicle Production 3MMA 10M Lead (RHS)
Chinese Economy Showing Greater Signs Of Stability, But Risks Mount
19
Source: Wind, Fitch Solutions
Structural Real GDP Growth Slowdown Still In Play% chg y-o-y
5.9
6.0
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
0
1
2
3
4
5
6
7
8
9
Q118 Q218 Q318 Q418 Q119 Q219 Q319 Q419
Primary Secondary Tertiary Overall (RHS)
Stimulus & Phase-One Deal Leads Manufacturing & Export Rebound
20
PMIs Point To Export & Manufacturing StabilityIndex
Sharp Pick-Up In Chinese Trade Growth% chg y-o-y
Source: Bloomberg, Fitch Solutions Source: Bloomberg, Fitch Solutions
44
46
48
50
52
54
56
Jan-1
5
Apr-
15
Jul-1
5
Oct
-15
Jan-1
6
Apr-
16
Jul-1
6
Oct
-16
Jan-1
7
Apr-
17
Jul-1
7
Oct
-17
Jan-1
8
Apr-
18
Jul-1
8
Oct
-18
Jan-1
9
Apr-
19
Jul-1
9
Oct
-19
Manufacturing PMI Non-Manufacturing PMI
New export orders PMI
-40
-30
-20
-10
0
10
20
30
40
50
60
Jan-1
4
Apr-
14
Jul-1
4
Oct
-14
Jan-1
5
Apr-
15
Jul-1
5
Oct
-15
Jan-1
6
Apr-
16
Jul-1
6
Oct
-16
Jan-1
7
Apr-
17
Jul-1
7
Oct
-17
Jan-1
8
Apr-
18
Jul-1
8
Oct
-18
Jan-1
9
Apr-
19
Jul-1
9
Oct
-19
Exports Imports
Downside Growth Risks For China Due To Coronavirus
21
SARS Cases Rose Quickly, But Contained In Six MonthsCumulative Cases
Chinese Retail Sales Sank & GDP Weakened% chg y-o-y
Source: WHO, Fitch Solutions Source: Wind, Fitch Solutions
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
Ma
r-02
Apr-
02
Ma
y-0
2
Jun-0
2
Jul-02
Aug
-02
Sep
-02
Oct
-02
Nov-0
2
Dec-0
2
Jan-0
3
Feb
-03
Ma
r-03
Apr-
03
Ma
y-0
3
Jun-0
3
Jul-03
Aug
-03
Sep
-03
Oct
-03
Nov-0
3
Dec-0
3
Real GDP Retail Sales 3mma
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Mar-03 Apr-03 May-03 Jun-03 Jul-03
China HK Taiwan Singapore Vietnam Others
Despite Global Stabilisation, Growth Will Be Capped To The Upside
22
CountryGrowth
2019
Growth
2020Risks
US 2.2 1.8
Slight upside risks to investment, but not
dramatically as election could cause some
uncertainty.
Eurozone 1.2 1.2Neutral, and already envisions a sharp pick-up
in German growth from 0.5% to 1.1%
China 6.1 5.9Large downside risks as coronavirus impacts
manufacturing, transport and services.
India 5.1 5.9 Neutral given still-tight credit conditions.
Brazil 1.0 2.3Neutral due to structural constraints and China
exposure.
Russia 1.2 1.7Growth acceleration to be capped by weak oil
prices and sanctions.
South Africa 0.4 1.2Several structural factors will limit how fast
growth will accelerate.
Turkey -0.1 2.0Deleveraging of private sector will cap any
acceleration in growth.
• Despite the stabilisation in global economic activity, our growth forecasts do not yet point to a sharp acceleration in growth.
• Although we will likely see some upward revisions to individual growth forecasts over the coming months, it is unlikely that we will see a sharp rebound in global growth.
• This is because some of the upside risks in some countries will likely be countered by downside risks in other parts of the world.
• For example, while investment in the US could surprise to the upside, the coronavirus could negatively impact China.
• At the same time, many emerging markets will battle with structural headwinds as well as pockets of inflation, which could limit stimulus measures
2019 = estimate; 2020 = forecast. Source: Fitch Solutions
Recession Risks Easing, But Vulnerabilities Remain
3
Recession Risks Easing, But Still Elevated By Historic Standards
24
• Although we see a stabilisation in global economic momentum – as data has improved – recession risks have not dissipated altogether.
• The yield curve still points to a relatively high probability of recession in the US, despite falling in recent months.
• The global economy is late cycle, and policymakers have less policy space, making it more vulnerable to shocks.
• There are various risks to monitor including policy constraints due to late-cycle pressures, the spread of the coronavirus, potential for an escalation in trade tensions, as well as military tensions (Iran) and equity markets that look stretched.
Yield Curve Model Still Pointing To Elevated Recession RisksIndex, %
Source: NY Fed, Bloomberg, Fitch Solutions
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0
5
10
15
20
25
30
35
40
45
50
Ma
r-89
Ma
r-90
Ma
r-91
Ma
r-92
Ma
r-93
Ma
r-94
Ma
r-95
Ma
r-96
Ma
r-97
Ma
r-98
Ma
r-99
Ma
r-00
Ma
r-01
Ma
r-02
Ma
r-03
Ma
r-04
Ma
r-05
Ma
r-06
Ma
r-07
Ma
r-08
Ma
r-09
Ma
r-10
Ma
r-11
Ma
r-12
Ma
r-13
Ma
r-14
Ma
r-15
Ma
r-16
Ma
r-17
Ma
r-18
Ma
r-19
Ma
r-20
NY Fed Probability of Recession US Recession Indicator (RHS)
Recession Tracker: Risks Easing, But Not Gone
25
Factor Dec-19 Jan-20 Comments
Policy
Risks
Tariffs: Increase in China, or Mexico/Eurozone. Δ Δ The phase-one deal between the US and China alleviates pressure.
Significant pressure on the Fed, causing a
policy mistake/resignation.Δ Δ
The possibility of a policy mistake has declined, but the Fed could
come under pressure again.
Macro
Risks
LEIs to weaken at current pace to below 2015-
2016 levels and fail to stabilise by Q120.Δ O
The manufacturing sector is in contraction but is starting to rebound.
Sentiment is improving and services are strong.
Steady deterioration in labour market. O OThe labour market remains robust, but NFPs and the number of new
job openings are slowing, showing some incipient weaknesses.
Deterioration in lending, money supply growth. O OMoney supply growth remains robust, and bank surveys point to still
reasonable lending conditions.
Rise in business and/or consumer-related
NPLs.O O
General NPLs remain low given monetary easing and low interest
burdens. Low-quality credit card debt is showing some stress.
Market
Risks
S&P declines by about 15-20% from peak,
breaking support at 2,500-2,700.O O
S&P has been hitting new highs and internals are strong, but risk of a
correction has risen.
A sharp leg higher in IG and HY credit spreads
towards/above 2016 highs.O O
IG and HY credit spreads remain tight. Germany-Italy spreads are not
pointing to much stress, although risk in Italy is rising.
Rally in safe-haven assets such as the yen,
treasuries, Swiss franc and gold.Δ Δ Safe-haven assets remain bid as investors are hedging their risks.
Sharp break out in US dollar. Δ O We are neutral on the US dollar as bullish drivers have eased.
Capacity Constraints Are Important To Monitor Late In The Cycle
26
Unemployment At Historic Lows%
Output Gap Already Eroded In Many DMs%
Source: Bloomberg, Fitch Solutions Source: IMF Bloomberg, Fitch Solutions
0
2
4
6
8
10
12
14
Dec-9
9
Nov-0
0
Oct
-01
Sep
-02
Aug
-03
Jul-04
Jun-0
5
Ma
y-0
6
Apr-
07
Ma
r-08
Feb
-09
Jan-1
0
Dec-1
0
Nov-1
1
Oct
-12
Sep
-13
Aug
-14
Jul-15
Jun-1
6
Ma
y-1
7
Apr-
18
Ma
r-19
US EZ UK Japan
-6
-5
-4
-3
-2
-1
0
1
2
3
Dec-9
8
Nov-9
9
Oct
-00
Sep
-01
Aug
-02
Jul-03
Jun-0
4
Ma
y-0
5
Apr-
06
Ma
r-07
Feb
-08
Jan-0
9
Dec-0
9
Nov-1
0
Oct
-11
Sep
-12
Aug
-13
Jul-14
Jun-1
5
Ma
y-1
6
Apr-
17
Ma
r-18
Feb
-19
US G7
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2015 2016 2017 2018 2019
GBP USD EUR
Inflation Remains Well Behaved For Now, But Could Rise
27
DM Market-Based Inflation Expectations Picking Up%, Based On 5Y Forward Swaps
EM CPI Not Yet A Problem, But Could Limit Policymaking %
Source: Bloomberg, Fitch Solutions Source: Bloomberg, Fitch Solutions
0
2
4
6
8
10
12
14
Nig
eria
Turk
ey
Ind
ia
Chin
a
Bra
zil
Sou
th A
fric
a
Pola
nd
Hung
ary
Chile
Russi
a
Me
xico
Ind
one
sia
Tha
iland
Isra
el
Latest CPI Reading, % y-o-y Central Bank Target Upper Limit
US-Iran Tensions Could Re-Escalate, Policy Misstep Is Key A Risk
28
Strait of Hormuz Still A Choke PointMap
Tensions Could See Oil Price Inflation Rise Suddenly % chg y-o-y For Different Price Scenarios
Source: Fitch Solutions Source: Bloomberg, Fitch Solutions
-40
-20
0
20
40
60
80
Jan-1
8
Ma
r-18
Ma
y-1
8
Jul-18
Sep
-18
Nov-1
8
Jan-1
9
Ma
r-19
Ma
y-1
9
Jul-19
Sep
-19
Nov-1
9
Jan-2
0
Ma
r-20
80/bbl 100/bbl 115/bbl Brent
Slow Response To Virus Could Impact Global GDP More Than 2003
29
• The coronavirus is spreading globally, and will have a negative impact on global growth if it is not contained.
• Although the SARS virus in 2002/03 did not impact Chinese and global GDP significantly, delays to containing the virus could be more growth negative now.
• China accounts for 16% of global GDP, compared with 4% in 2002 and int. aviation routes in China are much more developed than before. Chinese visitors abroad have risen to 160mn from 16mn in 2002. This could lead to a faster spread of the virus and a larger impact on GDP if not contained.
• This has broad implications for global GDP through multiple channels including; transport and retail but also around investor sentiment.
China Is Larger, More Connected%, km
Source: NBS, Fitch Solutions
0
5
10
15
20
25
30
35
40
China, % of GlobalGDP
Length of Int. AviationRoutes (100k, km)
2002 2018
0
20
40
60
80
100
120
140
160
180
Foreign Visitors ToChina (mn)
Chinese VisitorsAbroad (mn)
2002 2018
Sharp Rise In Flow of Peoplemn
Source: NBS, Fitch Solutions
0
10
20
30
40
50
60
70
80
90
0
500
1000
1500
2000
2500
3000
3500
Jan-0
7
Aug
-07
Ma
r-08
Oct
-08
Ma
y-0
9
Dec-0
9
Jul-1
0
Fe
b-1
1
Sep
-11
Apr-
12
Nov-1
2
Jun-1
3
Jan-1
4
Aug
-14
Ma
r-15
Oct
-15
Ma
y-1
6
Dec-1
6
Jul-1
7
Fe
b-1
8
Sep
-18
Apr-
19
Nov-1
9
S&P 500 CBOE VIX (RHS)
Equity Markets Look Stretched Given 40% Rally In S&P Since Dec-18
30
Coronavirus & Equity Correction Could Spur VolatilityIndex
Valuations Looking ExpensiveCase Shiller CAPE Ratio
Source: Bloomberg, Fitch Solutions Source: Bloomberg, Fitch Solutions
15
17
19
21
23
25
27
29
31
33
35
Fe
b-1
0
Jul-1
0
Dec-1
0
Ma
y-1
1
Oct
-11
Ma
r-12
Aug
-12
Jan-1
3
Jun-1
3
Nov-1
3
Apr-
14
Sep
-14
Fe
b-1
5
Jul-1
5
Dec-1
5
Ma
y-1
6
Oct
-16
Ma
r-17
Aug
-17
Jan-1
8
Jun-1
8
Nov-1
8
Apr-
19
Sep
-19
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