Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Chart of the Week: US OECD Composite Leading Indicator
Christopher Dembik
Head of Macroeconomic Research
Summary: Fresh data and a clear outlook from the Paris-based OECD foresees green shoots of recovery in China, paltry growth in the Eurozone and the UK, and the US dangerously hovering close to the recession zone.
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At Saxo, we use the OECD Composite Leading Indicators (CLI) to assess where the economy is heading. It is designed to anticipate turning points in the economy six to nine months ahead.
Last week, the OECD updated its data for March and the message sent by CLI is bright and clear: China stands alone in that it seems it will start to rebound (mostly due to the massive credit stimulus in T1 2019 that was about 9% of GDP), but all the other major economies are facing economic slowdowns in coming quarters and below-trend growth.
In the euro area, CLI is back to where it was in 2013 and in the United Kingdom to 2012 levels. However, in our view, the most worrying trend is in the United States. Looking at the CLI index monthly update, it has dropped 0.2 point to 98.8 in March, which is the lowest point since Autumn 2009. The year-on-year rate is also negative. In March 2018, it stood at 0.68% and it is now at minus 1.65% – quite a swing over 12 months!
The US CLI is currently at levels that are usually consistent with the risk of recession (with few exceptions, in 1967, in 1995 and in 2003). It reinforces our call that the current business cycle is very fragile at the global level and that there is very little margin for policy error in 2019. All will depend on China’s ability to strengthen its economy in coming months.
At Saxo, we use the OECD Composite Leading Indicators (CLI) to assess where the economy is heading. It is designed to anticipate turning points in the economy six to nine months ahead.
Last week, the OECD updated its data for March and the message sent by CLI is bright and clear: China stands alone in that it seems it will start to rebound (mostly due to the massive credit stimulus in T1 2019 that was about 9% of GDP), but all the other major economies are facing economic slowdowns in coming quarters and below-trend growth.
In the euro area, CLI is back to where it was in 2013 and in the United Kingdom to 2012 levels. However, in our view, the most worrying trend is in the United States. Looking at the CLI index monthly update, it has dropped 0.2 point to 98.8 in March, which is the lowest point since Autumn 2009. The year-on-year rate is also negative. In March 2018, it stood at 0.68% and it is now at minus 1.65% – quite a swing over 12 months!
The US CLI is currently at levels that are usually consistent with the risk of recession (with few exceptions, in 1967, in 1995 and in 2003). It reinforces our call that the current business cycle is very fragile at the global level and that there is very little margin for policy error in 2019. All will depend on China’s ability to strengthen its economy in coming months.
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