Is the global economy cooling off?

On the latest edition of Market Week in Review, Rob Cittadini, director, Americas institutional, chatted with Senior Investment Strategist Paul Eitelman about a potential moderation in global economic growth, the escalating risks of a trade war and the likelihood of an upcoming interest rate increase by the U.S. Federal Reserve.

New economic numbers suggest moderation in global growth rate

Global economic growth is always an important issue for markets, Eitelman said, as it typically drives equities higher over time. Since the middle of 2016, the world’s economy has been in a positive acceleration phase, he said—in other words, a period where global growth has increased each month. However, from Eitelman’s vantage point, there are now some early indications that growth may be starting to moderate. “Tentative evidence of a bit of a moderation is coming through in both recent global Purchasing Managers’ Index™ (PMI) data, and in earnings growth estimates from analysts,” he stated—“and markets will be watching this carefully, to see if this could be a bit of an inflection point.”

Eitelman added that in the U.S., more signals may be emerging, such as a decline in consumer spending. “The country just logged its second month in a row of weaker retail sales growth, and we’ve also seen some moderation in housing market activity,” he noted. In Eitelman’s opinion, this could potentially lead to a downward revision in U.S. growth estimates. He added that beyond the U.S., economic growth still looks pretty good, particularly in China. “Overall, the global growth story appears to be a bit of a mixed bag today,” he said—“but broadly speaking, we are seeing a slight moderation from very healthy levels.”

Uncertainty over potential U.S. tariffs on China impacting markets

Switching to the topic of trade wars, Eitelman said that the uncertainty surrounding the Trump administration’s plans for tariffs—especially on Chinese imports—is weighing heavily on markets. “News broke this week that the White House is mulling tariffs on roughly $60 billion worth of Chinese products, in response to a government investigation into Chinese intellectual property theft,” he explained. In Eitelman’s view, this amounts to a negative surprise for markets, especially because it’s unclear how China will respond to such a move. The news already appears to have had an impact, Eitelman said, noting that generally speaking, global equities moderated a bit the week of March 12.

Upgrade to Fed rate hike pace possible at March 21 meeting

Turning to the U.S. Federal Reserve (the Fed), Eitelman said that he and the team of Russell Investments strategists expect the central bank to increase rates at its upcoming March 21 meeting—for the sixth time since the nation’s current economic expansion began. “This is a pretty widely held view among economists and market participants,” he noted.

The bigger watchpoint for investors, Eitelman said, will be what guidance the Fed issues around its plan for interest rate increases going forward. Why? The central bank has been talking about a roughly three-hike pace for 2018 and 2019, but recent comments from Fed Chair Jerome Powell and others suggest that it may upgrade to four hikes this year and next, he said. “If the Fed does raise its guidance, this could potentially be a headwind for equity markets,” Eitelman said. At the margin, he believes the central bank will announce a plan for four increases in 2018—but emphasized that it’s an extremely close call.

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