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US Yield Curve Back On The Agenda

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Lately, global industrial production momentum appears to be driving risk appetite and hence risk assets. Looking below the surface, the general picture which appears to be emerging is one where the pieces are in place for a rebound in global industrial production momentum in the second quarter of this year.

This is still contingent on an announced US-China trade deal and a more settled Brexit situation but these two topics are closer to occurring.

However, markets have discounted much of the turn in industrial production already as the main equity markets are up some 10% this year. This means the real risk now is that industrial production does not form a bottom in the first quarter and does not rebound.

One thing to note is that the Rhine river water levels have risen back to seasonal norms. This is interesting since low Rhine water has been partly blamed for the fact that industrial production has been so weak in Germany, Europe’s largest economy. Barges that handle hundreds of fuel shipments up and down the river are now able to reach destinations fully loaded and this is something they have not been able to do for months. At the margin, this should be good for industrial production.

Chinese Data

One of the UK’s most respected economists – Gavyn Davies – wrote in the FT at the beginning of the week that China nowcasts – the best estimate of what is taking place on the ground at the moment – have rebounded and that activity is back in line with growth of some 6.0% to 6.5%. Every economist uses different models and not all economists are in agreement yet but it is telling that someone as credible as Gavyn would make this point in the FT.

Global trade

Any actual deal would have to be signed by Trump and Xi and it appears that Xi is reluctant to travel to the US to put pen to paper in case he is rumbled by Trump at the last minute and forced into last minute concessions. Whilst negotiators may have to take more time most analysts believe that a deal is likely and investors should not be surprised to see it signed in April. The real risk now is that it does not happen.

Brexit:

Theresa May’s deal failed on Tuesday but on Wednesday MP’s voted to take no deal off the table under all circumstances and the pound rallied hard. Last night MP’s voted to extend the deadline for leaving the European Union at least until June 30. There is growing talk of Mrs May bringing forward a third so-called “meaningful vote” on the deal – known in Westminster as “MV3” – as she tries to wear down the resistance of the 75 Tory MPs and 10 Northern Irish Unionist MPs who opposed the agreement on Tuesday. The probabilities of what will happen have not changed. The authors of this piece assign a 10% probability to a no deal outcome, some version of May’s deal at 60% and other outcomes – including a second referendum or no Brexit at all at 30%.

Assuming there is no hard Brexit, this should be good for the pound and so investors should consider their positions accordingly.