Kristalina Georgieva, managing director of the International Monetary Fund, projected global growth to remain around 3% over the next five years, marking the weakest medium-term growth projection since 1990 and well below the 3.8% average from the past two decades. “With rising geopolitical tensions and still-high inflation, a robust recovery remains elusive,” Georgieva said in a recent speech in Washington. That’s on top of the recent pressures in the banking sector that have made the global inflation fight that much more complex, she added.

The sub-3% growth this year is generally consistent with the 2.9% estimated in January and the 2.7% estimate in October. Advanced economies are expected to weigh the most on global growth, particularly in the U.S. and Europe where rising borrowing costs have hampered demand. The IMF sees some 90% of advanced economies posting a decline in their growth rate in 2023. By contrast, emerging economies are a “bright spot” as India and China together are expected to account for 50% of this year’s global growth.

Georgieva took note of central banks’ inflation fight in the wake of global banking issues, imploring them to “stay the course” in lowering inflation as long as financial pressures stay limited. While she implied that central banks should keep monetary policy restrictive until price stability is achieved, she urged them to “address financial stability risks when they emerge through appropriate provision of liquidity”. However, if turmoil in the banking system worsened, she said central banks may have to outright cut rates.

Fed watch: Friday’s payrolls report indicated that jobs growth rate is cooling, but the unemployment rate showed a tighter labor market. Traders believe the report locks in a 25-basis point rate hike by the Federal Reserve in May. Fed funds futures are now pricing in ~67% chance of a 25-basis point increase, compared with ~50% probability before the report.

Mott Capital Management, leader of Investing Group ‘Reading The Markets’, said the jobs data eliminated the odds of a rate cut in June. “The data that the Fed is focused on, such as jobs and inflation data, does not support the Fed’s rate-hiking cycle being over or for rate cuts,” he said. “On the other hand, survey data supports that the Fed is done with rate hikes and suggests a substantial economic slowdown is occurring.”

 

US Economy

 

  • The jobs report showed some cooling last month, but the labor market remains resilient for now.
  • Private employment gains were below expectations.
  • The unemployment rate is back at 3.5%, suggesting that the labor market remains tight.

 

 

  • Regarding inflation, fewer companies are talking about raising prices.

 

 

  • Consumers increasingly report that credit is harder to obtain than a year ago.

 

 

  • Sales expectations remain depressed.

 

 

  • Inflation cooled more than expected in March, due to lower housing, energy and food prices

 

 

  • The core goods CPI increased by most in months, which was partially driven by higher import prices.

 

 

  • The FOMC minutes suggest that without the banking turmoil, the FOMC would have raised rates by 50 bps. But concerns about financial sector stress and tighter credit conditions caused the Fed to downgrade its forecasts for economic activity.
  • Staff Economic Outlook:
    For some time, the forecast for the U.S. economy prepared by the staff had featured subdued real GDP growth for this year and some softening in the labor market. Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years. Real GDP growth in 2024 was projected to remain below the staff’s estimate of potential output growth, and then GDP growth in 2025 was expected to be above that of potential. Resource utilization in both product and labor markets was forecast to be much less tight than in the January projection. The level of real output was projected to move below the staff’s estimate of potential output in early 2024, more than a year sooner than in the previous projection. Likewise, the unemployment rate was projected to rise above the staff’s estimate of its natural rate early next year.
  • The PPI unexpectedly declined last month.

 

 

  • And so did the core PPI.

 

 

  • Sticky CPI:

 

 

Market Data

 

  • S&P 500 breadth and momentum indicators have improved over the past month.

 

Source: Aazan Habib, Paradigm Capital

 

  • However, the number of stocks that set new highs has declined on each successive rally this year.

 

 

  • According to the S&P Global Investment Manager Index, institutional investors are risk-averse and very negative on US stocks.

 

 

Quote of the Week

 

“I can resist anything except temptation.”  – Oscar Wilde

 

Picture of the Week

 

 

 

All content is the opinion of Brian Decker