While there has been some softening across a broad base of sector and individual components, the FLI cycle tracker remains in the top right quadrant. Two-thirds of individual components show positive acceleration, but fewer than a quarter saw their acceleration score improve this month.
Source: Fidelity International, July 2019
Three out of the five FLI Sub-Sectors now appear in the top-left quadrant, indicating below trend but accelerating growth. One is in the bottom-left, which points to below trend and decelerating growth.
Global Trade is the only sector remaining in the top-right quadrant of above-trend and accelerating growth, although even this saw both growth and acceleration readings dip this month - unsurprising given the timing of the latest US-China tariff escalation. Its reading may also have been flattered by comparisons to an abysmal start of the year, which was exacerbated by tariff-related inventory drawdowns.
Commodity-linked components improved further into the top-left quadrant, mainly driven by the Baltic Dry Index of shipping costs, though soft data is yet to turn the corner.
Consumer/Labour dropped back into the top-left quadrant as US components continued to weaken, continuing the theme of the US ‘catching down’ to softness in the rest of the world. German consumer confidence data is also plunging, even though other European indicators hold up.
Business Surveys is also in the top-left. The global new orders/inventories’ ratio continues to show signs of stabilising, after more than a year of deceleration. However, bellwether Eurozone surveys slowed after a better patch, exacerbating the fall also being seen in the US data.
Alarmingly, despite signs of improvement elsewhere, Industrial Orders have slipped back into the bottom-left quadrant, suggesting growth below trend and decelerating. This has been driven primarily by deterioration in US data, although much of the improvement seen year-to-date in Eurozone data also reversed at the latest reading.
Arguably, this month’s reading should have seen the largest, most direct impact from the recent US-China tariff escalation. If that is the case, then this month’s FLI could be interpreted as good news, indicating that the tentative global recovery has not been completely derailed by trade policy.
Reversal of key headwinds
Last year’s headwinds to growth have reversed to a large degree, which should underpin the tentative recovery seen in the FLI.
Global monetary conditions have eased significantly, with the US Federal Reserve set to cut rates and end quantitative tightening in the third quarter. Expectations of a fresh round of monetary easing by the European Central Bank have driven global bond yields yet lower. The US dollar has stopped its painful strengthening. Several emerging market central banks have started to ease. Meanwhile, Chinese policy has been surprisingly supportive year-to-date. China’s credit impulse has turned meaningfully positive, which should provide support - with a lag, but before year-end.
One negative offset is that US-China trade actions have undoubtedly hurt growth, especially this latest month. However, both direct and indirect impacts on global growth are likely to be small enough to be manageable. Moreover, the latest uneasy truce with the US on tariffs provides some respite. US fiscal policy is also turning into a modest drag over the next four quarters, which represents a very significant negative swing compared to the large stimulus seen last fiscal year; spill-overs to the rest of the world should be small, however.
The FLI ‘bet’
The FLI’s quantitative signal implies bond yields should rise from current, pessimistic, levels. It also suggests that risk assets should be well-supported, although these look vulnerable to still-soft overall growth rates given the strong run in equities year-to-date.