US and Europe cross economic turning point

27th Aug 2018

A turning point in this year’s economic story between the US and the eurozone has arrived and — if sustained — may well challenge Wall Street’s outperformance in 2018 and boost the euro.

Citi’s economic surprise index is now more negative for the US than the single market for the first time since the first quarter.

The respective indices measure economic data surprises relative to forecasts and, having surged well ahead since mid-February, the US index has stalled while the eurozone measure has steadily climbed off the canvas since mid-June.

Eurozone equities, led by banks, have lagged behind Wall Street for much of the year as the eurozone hit a soft patch during the spring.

Synchronised global growth was the main driver of markets at the start of 2018, which meant that the shift in the momentum of the growth trajectory became “the most importance influence of this year”, said Sandra Crowl, investment committee member of Carmignac, the European asset manager.

The divergent growth trajectories of the US and Europe have been a strong contributor to the dollar’s gains against the euro, and as Kit Juckes at Société Générale said, a shift in the surprise indices was a good reason for a euro recovery to $1.16.

The single currency has rebounded from a recent 14-month low of $1.13 and is now just shy of $1.16.

And while the S&P 500 is flirting with record territory and has become the longest bull market of all time, strength in recent months has come from a switch to defensive sectors such as staples, utilities and healthcare, hardly a reassuring sign. While the US economy grew at an annual rate of 4.1 per cent in the second quarter, the fastest clip in almost four years, and expectations for the third quarter are tracking well, Wall Street’s current leadership reflects a degree of anxiety over whether the market is poised for a bigger pullback.

Economists at TS Lombard note that the US economy “has yet to find reason for output to push above its 2014 highs, at least in the goods sector, and housing is beginning to soften”, and add that “Trump’s trade tactics should slow rather than accelerate activity, but they have yet to show through meaningfully in the macro data”.

Source: FINANCIAL TIMES