*By Christophe Barraud, Chief Economist & Strategist at Market Securities
According to TrackInsight data, investors kept piling on “Bonds” ETFs with cumulative inflows recently hitting a new YTD high. ETFs investors have been pushed to bet that interest rates will stay lower for longer amid mounting concern over softer U.S. economic data and President Donald Trump’s trade conflicts with major partners (China, India, Japan, Europe).
On Tuesday, U.S. consumer confidence (Conference Board) decreased by 10 points to 121.5 in June, the largest monthly drop since December 2018. It raised fears concerning households’ ability to support growth over the coming months in a context where investment and net trade have already been under pressure. Looking at labour components, the share of respondents saying jobs are hard-to-get rose sharply (16.4 vs 11.8 prior). The 4.6 points increase was the largest monthly jump since the Great Recession and raised concerns that the labour market weakened in 2019.
As a result, Federal Reserve Chairman Jerome Powell said that the downside risks to the U.S. economy have increased recently, reinforcing the case among policy makers for lower interest rates in the short term.
Focusing on trade disputes, the G-20 meeting will be scrutinized this week. President Donald Trump said that substantial additional U.S. tariffs would be placed on merchandises from China if there’s no progress on trade deal after his planned meeting with Chinese counterpart Xi Jinping (11:30 a.m. on Saturday in Osaka). Also on the trade front, President Donald Trump said India’s recent increase in tariffs on U.S. goods is “unacceptable” and should be withdrawn. A meeting with Narendra Modi is also scheduled for Friday at 09:15 a.m. in Osaka.
In this context, a WTO report shows that trade coverage of new import-restrictive measures during the period (October 2018 to May 2019) reached $335.9 billion (the second highest figure on record, after the $480.9 billion reported in the previous period). The latest wave of tariffs added pressure on global trade growth which has already experienced a recession from 4Q18 to 1Q19. Latest CPB figures suggest that the trend is unlikely to improve significantly with April data showing another decline of 0.7% MoM.
All in all, it appears that the U.S. growth engine is likely to be under pressure in the coming months potentially pushing the Fed to react with rate cuts very soon. Elsewhere, global trade growth will remain a drag on global GDP and will push other CBs to follow the Fed with accommodative measures, which would be a positive factor for bonds valuation.
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