Chart 2: S&P 500 Futures - Monthly
Slower economic growth in the euro zone has already caused analysts to predict the European Central Bank will not be in a position to hike interest rates any time soon. Euro zone money markets are now not fully pricing in an interest rate rise from the ECB until October 2019 or later. Just several weeks ago they were projecting an increase next September. In addition, there is speculation that the People’s Bank of China is considering interest rate cuts in an effort to stimulate China’s economy, after this year there has been several reductions in reserve ratio requirements for some of China’s banks.
Chart 3: Dow Jones Futures - Monthly Source: QTS
So, with major central banks likely to delay interest rate increases, as in the case of the ECB and others feeling the pressure to lower interest rates, how can the FOMC continue on a path of aggressive tightening? It is my contention that the hawkish rhetoric from Federal Reserve officials will moderate this year followed by an FOMC that is likely to adopt a more measured pace to rate hikes in 2019.
Source: QTS
The International Monetary Fund said the global economy is now estimated to grow at 3.7% in 2019, which is down 0.2 percentage points from earlier forecasts, according to the IMF’s latest World Economic Outlook report. The IMF said trade tensions between Washington and Beijing, in addition to tighter financing conditions in emerging markets and political uncertainties in Europe, will weigh on global economic growth, while the bump from President Donald Trump’s fiscal stimulus in the U.S. will fade, as higher borrowing costs begin to crimp consumer demand in the U.S.
Also, the global growth outlook for 2019 dimmed, according to Reuters polls of economists who said the U.S.-China trade war and tightening financial conditions would trigger the next downturn. The latest survey indicated that growth in approximately 70% of 44 economies has already peaked.
WILL THE BAD NEWS AGAIN BE THE GOOD NEWS FOR STOCK INDEX FUTURES? So once again, as was the case several years ago, when U.S. stock index futures advanced in spite of weaker economic reports, it appears that we may be in a situation where the bad news could be the good news again for stock index futures. Central banks around the world that are hawkish, such as the Federal Reserve, will realize they need to be less aggressive in hiking interest rates next year and those central banks that are still accommodative will need to remain accommodative for longer.
Ironically, a reduced rate of global economic growth may slow the pace of fed funds rate hikes next year which, in turn, will likely be the catalyst for higher U.S. stock index futures.
Alan Bush
E:
alan.bush@admis.com T: 001 312 242 7911
19 | ADMISI - The Ghost In The Machine | November/December 2018
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