During a game of rugby, players will often chase long kicks downfield to get behind the opposition’s defensive line. If the player can recover the ball, this can be a great strategy, but the oval shape of ball, which allows it to bounce at unexpected angles, makes this challenging. However, a perfectly timed kick and chase when combined with a fortunate bounce that sees the ball rise to the perfect height for the player can often look like sporting magic.
After a
strong rally in global equity markets this year against a backdrop of deteriorating economic data, market watchers are looking for a favourable bounce of their own in the form of a pick-up in economic momentum. However, a stabilisation in growth is more likely than significantly higher or lower rates from here. This is down to the ongoing
stimulus in China and the
pause in interest rate increases by the US Federal Reserve.
The promise of further stimulus measures from Beijing was the fuel markets needed to
rocket away from last year’s lows. Further fiscal and monetary policy measures are expected over the year, as local
bond issuance is increased to fund
infrastructure projects and the People’s Bank of China continues
to trim the reserve requirement ratio for small and large banks, to promote lending.
The standing of the Chinese economy can be fuzzy around the start of the year because of the Lunar New Year, but the purchasing managers’ index for manufacturing
nudged back into expansionary territory in March, indicating that the slide may be drawing to a close. The enhanced stimulus measures, however, are unlikely to deliver a material pickup but rather create equilibrium around the
6 per cent growth target, given the more nuanced nature of the measures compared with prior episodes of fiscal largesse.
The US is also likely to find its feet at a lower but stable growth rate. This is simply because the
tax changes introduced at the start of 2018 did an excellent job of boosting growth by raising the level of spending of small businesses and households for a period, but it was never going to be permanent. The economy will revert to its late cycle growth rate as the effects wear off.
Meanwhile, the economy is not at risk from an aggressive Fed ending this cycle too early. Since 2015, the Fed has raised the level of interest rates from a target band of 0-0.25 per cent to 2.25-2.50 per cent, or by 0.75 percentage points per year on average. This is one-third of the pace of the average tightening by the Fed in the past five hiking cycles.
