Brief Macro: Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook and more

In this briefing:

1. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook
2. Taiwan Investors Factor In China Recovery
3. FLASH: UK PMIs Pare Some Excess Pain in Feb-19
4. China – Eurozone Negative Feedback Loop.
5. Non-Performing Loans in China

1. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook

By embracing a patient policy approach, the Federal Open Market Committee (FOMC) imparted a positive shock to markets that has successfully banished investors’ fears of looming recession that prevailed in Q4. 

Meanwhile, the Federal Reserve Bank of New York’s Underlying Inflation Gauge suggests the future core inflation backdrop will not present a significant hurdle for the FOMC to ease policy if necessary.

Financial markets have firmly embraced a Goldilocks economic scenario that precludes further Fed action which will be ultimately beneficial for risky assets.

Fed Vice Chair Clarida has hinted at a potential tolerance for inflation overshooting the 2% target as part of an overall “makeup” strategy to compensate for persistent undershooting that has produced sticky inflationary expectations.

Ultimately, supply-side developments in the economy could determine the endgame for Fed policy and, consequently, the cycle by deferring the arrival of overheating.

2. Taiwan Investors Factor In China Recovery

It is time to go increase exposure to Taiwanese equities, if you haven’t already. Like bourses around the region, Taiwan’s stock market has rebounded from its January low and is up over 10% in two months. Underpinning our and investor optimism are expectations that Taiwan stands to benefit disproportionately from the fiscal and monetary policy easing underway in China,  that China and the US will get to some kind of trade deal and a positive reaction to TSMC’s 2019 dividend pay-out plan.

3. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

• The pace of UK activity growth implied by the services PMI picked up amid a surprise rebound to 51.3. It remains gloomy relative to the official data, consistent with the survey’s bias to exaggerate uncertainty’s depressing effect.
• A slight slowing in comparable sectors is still likely, but I maintain my relatively bullish forecast for 1Q19 GDP growth of 0.3% q-o-q, albeit close to rounding down.

4. China – Eurozone Negative Feedback Loop.

Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit,  this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China. 

5. Non-Performing Loans in China

We have all seen the think-pieces in western media talking about China’s economic slowdown. Much of content that western audiences understandably focus on is the effect the trade war has on the downturn. However, we ran across a piece of data entirely driven by China that gives us pause. The amount of non-performing loans has only continued to increase. Yet, according to a trusted source 2 trillion RMB has been shifted off of the books in China. This tells us that China cannot do enough to get rid of NPLs.