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Economics ResearchEconomics Products: Absolute Strategy Weekly, Economics Monthly, Newsflow Monitor.
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ASR/WSJ Global Composite NewsFlow Index: 58.7 in December (59.3 in Nov)
• The ASR/WSJ Global Composite Newsflow Indicator (CNI) of macro activity fell in December to stand at 58.7, compared with a 59.3 reading in November. Global CNI readings of around 50 have tended to be associated with stock returns keeping pace with bond returns on a year-on-year basis (see Chart 1). This month’s CNI reading of 58.7 appears to confirm the equity-to-bond returns ratio, which has turned positive over the past month.
• Our proprietary NewsFlow indicators are created by searching the Dow Jones Factiva database for ‘positive’ and ‘negative’ macroeconomic news stories, counting them, and then calculating the difference (the ‘net’ news flow). The searches are done in English, so the global series will be dominated by stories from and about the Anglo sphere. But they still capture global trends well.
• The Global CNI is built up from six sub-indices – see Charts 2-7 on pages 2 & 3. At the global level, the CNI stabilised after two significant and consecutive increases. Yet the Economic NewsFlow showed continuing signs of improvement. What’s more, the Earnings NewsFlow component jumped to its highest level since 2014.
• Supplementing the usual set of NewsFlow indicators, we have included a special set of Stimulus NewsFlow charts on the back page. We constructed these in response to suggestions that a looser global fiscal stance might spark regime change. Searching regional newspapers for ‘fiscal stimulus’, we find that chatter around fiscal stimulus is largely limited to the US (Charts 50-53).
Financial markets seem steadily more optimistic about 2017. But we would caution against getting too carried away. With China’s stimulus fading and the Trump fiscal package not culminating until 2018, global growth looks unlikely to strengthen much next year. At the same time, rising inflation could mean we have passed ‘peak QE’. This leaves Europe in limbo. Despite an improving economy, political risks could continue to agitate investors.
Global growth: signs of lift off?
• There are signs that global growth is picking up, perhaps quite strongly
• This is not due to Trump; China’s stimulus is the more proximate cause
• But with China’s stimulus now subsiding, growth could slow in 2H2017
• We expect global growth of just 3.1% next year, after 3.0% this year
The US economy: stagflation before reflation
• We doubt that the US economy will strengthen significantly in 2017
• Trump’s fiscal stimulus looks unlikely to provide much uplift next year
• With the economy at full employment, inflation could track higher
• This keeps the Fed in play, but the pace of tightening should remain slow
Global inflation: four winds
• Declining ‘slack’ and rising tradable goods prices could boost inflation
• The political onus to raise wages could increase cost pressures further
• Protectionist sentiment could also put supply chains under pressure
• Central banks appear increasingly tolerant of some inflation ‘overshoot’
Europe at a crossroads
• We think Europe’s political establishment should survive 2017
• In this environment, the recent economic improvement should persist
• The European recovery could be on the verge of a ‘self-sustaining’ dynamic
• In contrast, the political outlook is more vulnerable to external shocks
Five ‘Grey Swans’ for 2017
1. What if ... Donald Trump is serious about imposing tariffs?
2. What if ... Marine Le Pen is elected French President?
3. What if ... Investors have given up too soon on Abenomics?
4. What if ... Higher rates and a stronger USD undermine the credit cycle?
5. What if ... The UK reverses its decision to leave the EU?
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