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HIMCO 1st Quarter Macro Insights


The first quarter of 2019 left investors with a murky outlook for the global economy. The European and Chinese economies showed signs of further slowing and in the U.S., economic data generally disappointed. U.S. weakness was largely attributable to transitory factors including prior declines in U.S. equities and a protracted U.S. Government shutdown while the European and Chinese slowdowns appear rooted in prior policy actions. Looking ahead, we anticipate improvement in U.S. economic data during the second quarter and stabilization in the Chinese economy through the middle half of this year. In contrast, Europe’s economic backdrop is likely to remain challenged throughout 2019. As was the case in 2018, major central banks including the U.S. Federal Reserve (the Fed), the European Central Bank (ECB) and the People’s Bank of China (PBoC) face a challenging environment in which to engineer soft landings for their respective economies.


For 2019, we expect U.S. growth to slow modestly from the robust pace of 2018. The outlook for the first quarter of this year was muddied by the U.S. government shutdown, which temporarily dented consumer and business confidence and disrupted the normal collection and release of government-produced economic data.1 As a result, we are witnessing continued divergence between “hard” and “soft” data. Hard data is pointing toward weaker growth and soft data—primarily sentiment indicators—suggest any overhang from the shutdown is largely behind us. In light of the distortions from the government shutdown, we believe the soft data provides a more accurate portrayal of the health of the U.S. economy. For full-year 2019, we forecast U.S. growth in the range of 2.4% year over year, a pace that would leave the domestic economy growing firmly above trend.2


After successfully executing its dovish pivot earlier this year, the Fed used the March FOMC (Federal Open Market Committee) meeting to reinforce its dovish stance.3 The Fed’s dovishness surprised us and the market and we now believe the probability of another rate hike in 2019 is quite low. The pronounced shift from the Fed was well received by risk markets and, in our view, increases the chances of a soft landing for the U.S. economy.


In contrast to the anticipated U.S. growth, Europe’s economy continues to lose momentum. We believe the slowdown in Europe is due to a host of factors including the wind-down of ECB (European Central Bank) monetary stimulus, global trade frictions and reverberation from China’s economic slowdown. Historically, growth slowing to slightly below trend levels would not be cause for heavy concern; however, Europe is in a precarious position due to its lack of available policy levers. The ECB deposit rate is already below zero and self-imposed constraints on sovereign bond purchases will likely limit policy makers’ ability to easily restart quantitative easing.4 Further constraining the ECB are political considerations around monetary financing, which is constraining the use of easing measures that could be seen as unduly benefiting the highly indebted, peripheral countries of southern Europe. As a result, we fear the ECB will be unwilling to respond to its current economic downturn unless conditions deteriorate substantially.


In China, the economy appears on the cusp of stabilizing following a meaningful deterioration in the economic data over the second half of 2018. Among the most encouraging signals is the rebound in credit creation that occurred in the first two months of this year.5 In our view, this rebound in lending should begin to flow to the real economy over the next couple of quarters and lead to a modest uptick in the hard economic data. That said, we caution that those expecting a major surge in China’s economic activity are likely to be disappointed. China’s policy makers continue to pursue targeted easing measures that are unlikely to result in a rebound in growth as robust as was experienced in China during the second half of 2016.


With the global economy facing challenges across multiple fronts and the business cycle exhibiting signs of late-cycle behavior, we believe monetary policy makers are facing an increasingly delicate backdrop. In the U.S. and China, the Fed and PBoC have policy space. This should bolster confidence that these two central banks will respond should conditions warrant action. In Europe, however, where policy levers are constrained, the ECB risks responding too slowly and/or too timidly. As a result, we believe the risk of a policy error remains elevated in Europe.




1
Consumer Confidence Survey, The Conference Board, March 26, 2019


2HIMCO U.S. GDP forecast, as of April 2, 2019


3Federal Open Market Committee Meeting, March 19-20, 2019, www.federalreserve.gov


4European Central Bank Deposit Facility Rate, April 2, 2019, Bloomberg Professional


5China React: Seasonal Credit Slump Doesn’t Break Leverage Trend”, Bloomberg Professional, March 11, 2019


This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.


The forecasts, opinions and estimates expressed in this report constitute the judgment of Hartford Investment Management Company (HIMCO) as of March 31, 2019 and are subject to change without notice based on market, economic and other conditions. The assumptions underlying these forecasts concern future events over which we have no control. The assumptions may turn out to be materially different from actual experience. There is no guarantee that any forecasts made will come to pass. Sectors referenced should not be construed as a solicitation or recommendation or be used as the sole basis for any investment decision. All data contained in this material is from sources deemed to be reliable but cannot be guaranteed as to accuracy or completeness. All investments are subject to risk, including possible loss of principal. Fixed income investments are subject to credit and interest rate risk. Investments in high yield and foreign securities involve risks beyond those inherent in higher-rated and solely domestic investments. These risks are magnified in emerging markets. Past performance is no guarantee of future results.


 (HIMCO is an SEC registered investment adviser subsidiary of The Hartford Financial Services Group, Inc. (SEC registration does not imply a certain level of skill or training; nor does it imply that the SEC has sponsored, recommended, or otherwise approved of HIMCO).


HIMCO is not affiliated with Advisors Asset Management, Inc. (AAM). AAM was not involved in the preparation of this article, and the opinions expressed herein do not necessarily reflect those of AAM.


© 2019 Hartford Investment Management Company. All rights reserved. Inc.


 CRN: 2019-0422-7393R


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