APRIL – IN LIKE A LION
We continue to think the current market is relatively conducive for risk assets, as we think the wall of worry is a bit shorter than it was a month ago. The central bank cycle contains fewer surprises at this point in the year as most of the liquidity wild cards have been played and the market has taken lower yields as gospel. Given that the only surprise from today’s ECB meeting was the high jumping ability of an uninvited protestor, it’s safe to say that the ECB QE cat is well out of the bag. ECB President Draghi certainly dispelled any rumors/concerns over an early wind down of its QE program, but we had thought it somewhat inconceivable that they would raise a victory flag just months after launching the program. The party line is now that the ECB will see the 1.1 trillion euro program run its full course through September, 2016, and possibly longer if inflation fails to revive towards a 2% level. Given that we find much of Europe’s deflationary concerns demand driven, it’s hard to see prices rising meaningfully until a much stronger economic recovery begins to emerge. The chances for that have improved since the start of the year. As highlighted by the IMF’s recent economic forecast, most of the euro zone was upgraded by 20 to 30 bps although growth still remains closer to 1% rather than 3%. Growth expectation for the U.S. were downgraded to 3.1% this year (from 3.6%) and 3.1% next year (from 3.3%). Overall, global growth was left unchanged from their January assessment at 3.5% for 2015, while 2016 was revised slightly upwards to 3.8% from 3.7%. Interestingly, China was left unchanged at 6.8%/6.3% (2015/2016), while both Brazil and Russia were downgraded. The takeaway is that the IMF does not see a strong rebound from 2014’s sub-par performance and the risk to growth continues to emanate from emerging markets, even as the advanced economies stabilize. This continues to spell largess from the world’s central bankers to us, with most of the surprises in the first quarter as we start the current one. Even the Fed, which continues to signal a likely rate hike later this year, is viewed with risk coming from a later lift-off rather than a June rate hike. We concur with this outlook, but still think that the September/October time frame makes the most sense for a committee that badly wants to start the normalization process. Recent economic data also continues to underwhelm, with the weak employment report followed up by unimpressive retail sales, waning small business optimism and weak manufacturing and industrial production data. The overall level of economic disappointment has improved, however with the surprise index rising from a -70 level to the current -50 level, is still not good, but better.