As of September 30, 2019
The dovish shift of monetary policy this year has been dramatic as negative trade headwinds and geopolitical uncertainty are weighing on growth. So far, 21 central banks have moved into outright easing mode, which should help stabilize global growth and allay fears of an impending recession. However, monetary policy is at an unusual starting point. After a decade of unprecedented monetary stimulus around the world, rates are already at historically low levels and inflation remains stubbornly low, raising questions on its effectiveness. While policymakers continue to stress that they are ready to do more, policy has been restrained and largely reactive to date, allowing trade negotiations to drive the macro outlook.
In late August and early September, equity markets experienced a sharp rotation out of momentumdriven growth stocks into more cyclically oriented value names. This was a significant reversal in leadership, as cyclical companies had long been shunned by investors amid weak global growth while defensive growth stocks continued to lead. Bond markets similarly showed signs of inflection as interest rates bucked their downward trend, reversing a large part of August’s steep decline. Was this an unwind of extended growth equity valuations and overly bearish sentiment that sent rates to record lows? Or does the market truly believe that economic growth will pick up enough to sustain earnings and price momentum of cyclical sectors?
While sentiment within eurozone services has remained resilient, confidence within manufacturing dropped to its worst level in nearly seven years. The decline, largely driven by weakness in Germany (the region’s largest economy), has raised fears that Europe may be headed for a recession. Uncertainty surrounding Brexit, trade disputes, and issues in the auto industry have all weighed on growth within the region. Monetary policymakers have already stepped back in to support growth, and after years of austerity, an increasing number of countries are expected to provide fiscal stimulus. The question remains whether policymakers can deliver enough support to avert a third euroarea recession in the past decade.