- This podcast explores some of the reasons for more jittery markets and discusses the outlook from here.
- We note that US fundamentals remain solid, that inflation levels are still well-contained and that severe downside scenarios carry a low probability.
- Fundamentals for the rest of the world are not as auspicious however and that’s a potential source of further market instability in the period ahead.
A lot of market attention has focused on where the neutral rate is in the US economy, which is not yet feeling much restraint from the extant monetary policy tightening. This podcast explores why the tale is very different elsewhere: left-hand growth risks are increasing. In a desynchronised world the resilience of the US economy adds a further threat to the mix for the rest of the world – the prospect of a sustained increase in the global cost of capital and accordingly an increase in the probability of a left-hand growth outcome.
The threats to ex-US growth remain all too readily apparent: trade protectionism, a more acute slowdown in China, Italy’s fiscal profligacy, rising oil prices, ebbing global liquidity and the aftershocks from many of these factors that are being felt in emerging markets.
Rising growth tail risks and higher risk-free USD funding costs could propagate as an increase in the cost of credit and equity funding. Balance sheet models of marginally profitable businesses may be tested. At the macro level, private sector credit imbalances have been most prevalent in emerging markets – particularly in Asia and LatAm.
Perhaps the most concerning thing about this global desynchronisation is that policymakers’ outside the US have less ammunition to fend off a more acute slowdown – particularly in developed markets. Furthermore, given current levels of accommodation the marginal impact of rate cuts/further rounds of QE is presumably quite low. We are also seeing evidence of inflation pressures emerging in Europe which could generate a difficult policy trade-off for the ECB.
For full details, read the cross-asset report Desynchronisation available on the Global Research Portal.
Head of Developed Markets Economic Research
Macro Strategy Research