Economic and Strategy Viewpoint - April 2019

Profits pressures, recession fears and the Fed

- Investor concerns have switched from trade wars to politics and growth. The inversion of the yield curve is now adding to US recession fears. We see scope for a near term bounce in activity, but remain concerned further out.

- Profits are expected to come under pressure as margins are squeezed with the risk this will prompt cutbacks in jobs and investment. Companies may limit cost pressures, but such an environment could bring rate cuts from the Federal Reserve in 2020, if not sooner.

ECB rates policy: is the tail wagging the dog?

- The European Central Bank has once again delayed its expected date for raising interest rates. It believes it is ahead of the curve in its forward guidance, but we disagree. The ECB is clearly behind market expectations, and its shift in guidance to protect its credibility is only hurting it.

- The delay in tightening policy is leading investors to believe that the negative interest rate is the new normal as they draw comparisons with the Japanese experience. This has profound implications for banking profits and raises serious questions over the redistribution effects of its policy.

Indian elections: does Modi matter?

- Elections loom in India, with a Modi victory looking most likely, but whoever wins we remain cautiously optimistic about the path of Indian growth.

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Economic and Strategy Viewpoint - April 2019 16 pages | 700 kb