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Fixed Income Quarterly Outlook – Q3 2019

Global Fixed Income

BNP Paribas Asset Management

Central banks must know something we don’t

Key Points

  • At this time, we cannot conclude that the trade wars are resolved and that the risks for the global economy are contained. However, the current level of tariffs do not look like they will be as high as originally thought.
  • Aside from the impact of trade tensions in China, there has been a deceleration in activity. We believe this slowdown was inevitable, as the country could not grow at a double-digit rate indefinitely.
  • Hard data on GDP is likely to disappoint with growth possibly slowing in both the Eurozone and the U.S. This being said, we still believe that the risks of a full-blown recession are overplayed and the outlook for domestic demand is still reasonably positive in both regions.
  • Our medium-term view is that central banks are more likely than not beginning an easing cycle whose amplitude is as yet undetermined.

Full Commentary

There is a tendency to exaggerate the lasting importance of events – data outturns, policy decisions and even elections can often turn out to have an ephemeral impact on markets, even if the initial market response to the news can be material. Trade tensions probably do not belong in this category. If the process of de-globalization does gather momentum, it is unlikely to do so in a smooth fashion. Protectionism is likely to arise in fits and starts, with periodic reversals as negotiations sometimes delivering de-escalation. Recent months serve as a microcosm of this process, mwith the pendulum of protectionism swinging back and forth several times.

By the end of May, President Trump had opened up a new front in the trade war, threatening to impose tariffs on Mexico, starting at 5% but theoretically building to 25% unless, and until, Mexico took action to stem the flow of illegal migrants into the United States. The timing mof this intervention was particularly important because the re-worked version of NAFTA – the United States-Mexico-Canada-Agreement (USMCA) – that Trump had engineered was in the process of being ratified by Mexico. A deal was done within days to avoid the tariffs, but the implicit signal to the rest of the world was clear: deals can always be revisited, truces may prove temporary. Finally, productive discussion between Presidents Trump and Xi at the G20 Summit averted the threat of an escalation of tariffs and signaled a partial dilution of the restrictions on Huawei.

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