How the ‘Boris Bounce’ Mirrors Our Global Outlook

Recent economic data from the U.K. encapsulates our thesis for the global economy in 2020. When political uncertainties take a backseat, the fundamentals have a chance to come to the fore and drive growth. In the U.K., election and Brexit uncertainty has downshifted considerably, and that’s translated into the real economy as business activity perked up considerably in February. 

We expect a similar story to play out in 2020 throughout the broader global economy. Although the coronavirus has temporarily put the growth narrative in the penalty box, we believe the virus is a temporary fear and growth will get back in the game. Last week’s housing data and leading economic indicators further support our view.

Coronavirus fears sent stocks lower to open this week as the number of confirmed cases rose outside of China, namely in Italy, South Korea and Iran. This is a dynamic situation that we’ll be keeping an eye on throughout the week. The rest of the week will be busy, with revisions to fourth-quarter GDP coming Thursday, a raft of consumer data, business spending and more. We’ll also have manufacturing and services data from China, which will help us gauge how far sentiment and activity retreated due to the coronavirus. 

WALL STREET WRAP

Leading Indicators Head Back Up: The Conference Board Leading Economic Indicator Index rose 0.8 percent in January to 112.1, a return to the upside after declining 0.3 percent in December. A drop in unemployment claims pushed the index higher, along with increased housing permits and the consumer’s improved outlook on the economy. While manufacturing remains soft and the impact of the coronavirus outbreak on supply chains is a wild card, the data suggest the current economic expansion is poised to continue.

A Supply Crunch in Housing: The housing market cooled a bit compared to December, but the numbers still point in an encouraging direction if you dig a little deeper. Existing home sales fell 1.3 percent compared to December but were up 9.6 percent on a year-over-year comparison. One thing holding sales down is a lack of supply, especially in lower-priced segments. There were 1.42 million homes on the market in January, which was down 10.7 percent from a year ago — the lowest inventory level since 1999.

On the other side of the coin, pent up housing demand has been a boon for builders. Permits for new construction jumped 9.2 percent last month, the highest since March 2007. That’s driven builder confidence near to its highest level in nearly two decades, according to the National Association of Home Builders.

“Boris Bounce” Confirmed? Business activity perked up along several fronts in the United Kingdom in February following Prime Minister Boris Johnson’s election victory and the official withdrawal from the EU. Both service providers and manufacturers reported stronger activity in February and said a decline in political uncertainty boosted spending, according to IHS Markit data. Retail sales and inflation also floated higher, a sign that consumers are feeling pretty good too. The positive swing in the U.K. economy comes on the heels of declining political uncertainty, something we believe will help overall global growth regain its footing. The “Boris Bounce” in the U.K., though just part of the world, is a case-in-point example of our broader thesis for global growth, generally, in 2020.

Japan’s Economy Shrinks: The third largest global economy, Japan, hit a bit of a speed bump in the October-December quarter, as GDP shrunk at an annualized rate of 6.3 percent. The weak read was largely attributed to Typhoon Hagibis in October and an increase in the national sales tax to 10 percent from 8 percent, which both proved to be a drag on consumer spending. Now, there’s some concern that the coronavirus will hit consumption again this quarter as tourism and supply chain disruptions slow spending.

Fedspeak: Don’t expect rates to rise any time soon. In remarks prepared Friday, Fed governor Lael Brainard said Fed “policy may have to remain accommodative for a long time to achieve 2 percent inflation following a period of undershooting.” The Fed has set a 2 percent inflation target to give the central bank policy flexibility if the economy hits a rough patch. So far, inflation has remained just shy of the target. In a CNBC interview Thursday, Fed Vice Chairman Richard Clarida said, “The fundamentals in the U.S. are strong: sustained growth, strongest labor market in 50 years, price stability with inflation close to our goal.” Clarida said the coronavirus will have measurable effect on China’s economy, but hasn’t affected the U.S. much, thus far.

 THE WEEK AHEAD

Wild Card Saturday: Analysts aren’t sure what to expect when China’s official manufacturing and non-manufacturing PMIs for February come out this coming weekend. The numbers have a high degree of uncertainty, as officials have taken unprecedented measures to limit the spread of the coronavirus. Factories have been closed and vital transportation linkages have been shut down. For these reasons, Moody’s lowered its full-year GDP expectations for China from 6.1 to 5.4 percent.

A Data Crunch: It’s a full slate of U.S. economic data this week. Revisions to fourth-quarter GDP, personal income, consumption, durable goods orders, capital goods orders; needless to say, we’ll be busy pulling out relevant highlights and sorting through the noise.

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