Red list review: how are the macro themes developing in 2015?

Having first posted it 3 months ago, it is time for me review my “red list” of global macro themes. I tend to review it on roughly that frequency, in part to see if the themes have endured/played out as I had expected, and partly just because I think it is good practice to have a re-think on slightly longer horizon than the day-to-day/week-to-week trading view. So here is what I suggested 3 months ago, and a short summary of how they have progressed:
1. Global monetary policy divergence

Still a key macro theme, although the timing of it has shifted back a little. Nevertheless, the Fed and BoE will start to normalise (this year in my opinion), while the ECB and BoJ are still aggressively easing. Outside the big 4, renewed easing cycles is the main news (eg PBOC, BoC, RBA, Riksbank, RBNZ expected), with just Brazil moving in the other direction. That is not to say there won’t be some global growth convergence this year. But the starting points for different economies (ie output gap) is very different.

2. Fed normalisation

Three months ago I had thought that June was most likely start point for Fed normalisation, with a risk of them going a little later based on the very weak headline inflation prints that would be in the pipeline. Oil actually turned around and I am less concerned about the inflation outlook delaying the first hike, but instead the extraordinarily weak Q1 activity has done the job instead. I expect that to be a bump in the road though, particularly as the labour market continues to tighten, so now think Sept is most likely point of first tightening, but with a risk of slipping to December.

3. Impact of QE

This has turned out to matter much more than I expected in the EZ. Govt bond yields collapsed, and then spiked back up again. And the euro has similarly traded a very wide range. Looks to me like poor liquidity, extreme positioning and worries about Greece is playing havoc with European markets. But crucially market-based measures of inflation expectations have stabilised and even risen a bit, which should see a further steepening in the curve (as happened in the US).

4. EA (debt) deflation risks

Whilst not completely off the table, the risk of this tail has seemingly subsided. EZ growth has surprised consensus on the upside in Q1 (although it was less surprising to me) and core CPI has stabilised (with headline likely to rise fairly sharply once the base effect of oil prices drops out at the end of this year). Clearly there are still problems, not least Greece, but they seem containable.

5. Japanese reflation

In Japan, no further addition to QE, but the equity market (and to a lesser extent JPY) continue move as expected. This theme still has a long was to go.

6. Global macro implications of lower oil prices

Oil prices are down around 45% from their peak. That is still one heck of a global shock. But back in March they were down nearly 60% from peak. So the (very) partial retracement and subsequent stabilisation has meant that this theme feels a bit dated. That said, understanding the impact of the decline in oil prices on consumers, as well as on importers/exporters remains important. Not least in the US, where much of the benefit to consumers seems to have initially been saved rather than spent. Determining if that is just a slower pass-through, or reduced one is significant for growth this year.

7. Secular stagnation (or the lack thereof)

This theme has taken on a life of its own in recent months in terms of economic commentary (thanks to the Ben Bernanke/Larry Summers blogs). But it remains a hypothesis, rather than an empirical fact. I come down on the BB side of the argument.

8. EM fragilities (debt overhang)

This is a theme I haven’t spent much time looking at, but has not gone away. The nature of such debt overhangs means that it takes a long time for the stock to worked off. The worry is if a shock comes along to turn an orderly unwind into something disorderly. The Fed lift-off may be a trigger.

There are 4 new themes I would want to add now:
* China slowdown/easing
I think it is really hard for outsiders to understand what is happening in China, but it seems like a big deal. The aggressive easing suggests that they are: a) worried that a transition to structurally weaker growth is getting messy; b) are not prepared to accept weaker growth at all; c) have lost control of policy and are starting to panic. Whatever, China growth is clearly very important to the rest of the world.
* Productivity and wages (US, UK, Japan)
I think this is of sufficient importance to get its own theme. It will be key to the tightening (and end of loosening) cycles.
* Financial mkt volatility
This has really picked up in recent months. If this is a structural change, then how one trades macro markets needs to adjust with it.
* Interplay between monetary policy and macroprudential
Macropru is becoming increasingly popular as a tool to complement monetary policy, both in developed and emerging markets. A variety of approaches are being tried, and their success (or lack thereof) will impact the monetary policy outlook.
So my updated Red list is:
1. Global monetary policy divergence
2. Fed normalisation
3. Impact of QE
4. China slowdown
5. Japanese reflation
6. Productivity and wages (in particular US, UK, Japan)
7. Financial market volatility
8. EM fragilities (debt overhang)
9. Interplay of monetary policy and macroprudential policy

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