Seeking Alpha

Global Macro: Our 2020 Outlook

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Includes: FEZ
by: Alfonso Ricciardelli
Alfonso Ricciardelli
Bonds, debt, medium-term horizon, research analyst
Summary

Fears of a recession in the United States seem to have been overblown, and the bar for further Fed cuts has been raised considerably.

The ECB is on hold for now and is likely, especially given the latest eurozone economic forecasts, to keep the current stance unchanged. Keep an eye on the review, though.

On trade, spats between global powers, a feature of 2019, are likely to become the norm, and continue to affect global supply chains and thus manufacturing.

Major Central Banks

The Federal Reserve intervened in Q4 to calm tensions in the private repo market, which was drying up, by injecting considerable liquidity.

But fears of an upcoming recession in the United States seem to have been overblown, as the December 15 truce - and the news of an upcoming signing of the US-China "Phase I" agreement - unleashed a "tremendous" end-of-year market rally.

Investors are now, as a consequence, less dovish on US rates in 2020 - prior to the US-China Phase I agreement, anecdotally, many traders were expecting a further 50 basis points in cuts for 2020.

By and large, we agree that the Fed is on hold, but we still see risks to the economy tilted to the downside in 2020. For that reason, we do not entirely dismiss the possibility of yet more cuts a priori.

The wildcard is, however, the housing market, which has been uncharacteristically subdued during this 10-year long expansion - some say for structural reasons related to the millennials' reluctance to buy homes, as well as increasing resistance to take on more debt - but has shown signs of life lately and could be a surprise factor in 2020. If that is the case, and we suspect it might be, the Fed might be forced to reconsider its dovish stance altogether.

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The ECB is on hold for now and - despite President Lagarde's optimism on the economy - is likely, especially given the latest eurozone economic forecasts, to keep the current accommodative stance at least through Q1 2020.

There are high expectations for the "Internal Review," which - from what we understand - many officials were advocating for quite a while. We expect the ECB review to reflect some of the themes that will come out of the Fed's own "review," and we would not underestimate its width and potential for disruption.

Rather than focusing on the captivating topics of cryptos and climate change, analysts should look closely at the debate on inflation measurement, definition of the mandate (specifically, the issue of inflation symmetry) as well as at changes to the current models.

From what we've been told, one of the reasons inflation in the eurozone was constantly undershooting ECB projections is that ECB models are built so that inflation always converges to close to 2% in the medium term.

In other words, many officials within the ECB believe the models should reflect reality and not the ECB's policy preconceptions.

Political Risk

On trade, spats between global powers, which were a feature of 2019, will become the norm, and may signal the beginning of an era of anti-globalization.

We expect and have been warned that if US President Donald Trump gets re-elected in November, he may become more adversarial with China and the EU, driving market volatility up.

On that note, US elections in 2020 are not considered a high-volatility event by most investors. Markets seem to be pricing a 70% chance of a Trump re-election - with almost insignificant odds that a less market-friendly candidate could make it into the White House.

Our sense is that this is Trump's election to lose, and it is precisely for this reason that we do not expect POTUS to rock the boat on the road to November, and if a renaissance of free trade is out of the question, we at least expect no new escalation before November.

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On the ever present issue of Brexit, of course we are well aware that it is not over - UK-EU trade negotiations will be hot throughout the year, and we would not rule out an extension of the end of transition date - now set for December 31, 2020.

Brexit's phase I will in any case happen on January 31, when the UK will officially exit the European Union and the transition period will officially begin.

Our understanding is that negotiations for a trade deal are already ongoing - privately - so we are cautiously optimistic on the final outcome. But we expect them to last for many months and bring uncertainty and increased volatility in GBPUSD, as well as local stock markets - mainly to stocks that are highly sensitive to trends in UK-EU trade such as UK-focused commercial banks and retail firms.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.