The equity market appears convinced that we have entered a healthier stage, seeing a synchronous global expansion early in its upturn. This micro view is influenced by accelerating earnings, stepped-up confidence, prospects for spillover into spending and investment, all coming together after a long holding period. China’s reluctant consumers also are coming alive. Just ask Alibaba. Chinese millennials, after allowing their initial decade of stepped-up income to swell savings rates to unheard of levels, now are spending down this enormous pool of funds. Stocks are comforted that central banks are signalling the gradual removal of fragility-based monetary policy, which they see as validating their confidence in the outlook and fortifying future safety nets. Since the last two recessions were caused by bubbles that burst – first in the stock market in 2000-2003 and then in the housing market in 2007-2008 – early central bank tightening should extend the cycle, say the optimists, and thus is a positive.
In contrast, the more macro-focused fixed income markets are riveted on recent dips in inflation, falling prices for iron ore and oil, stagnant wage growth, and a China that once again is throttling back on credit. For them it’s déjà vu 2015, with current signals validating their concern that the global economy remains too fragile for central bank accommodation to be removed. The bond market is screaming ‘Policy Error’ and pointing to a flattening yield curve as predicting rising odds of recession. This validates their concerns.
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