![]() While we expect Beijing to continue its cautious approach, we recognize that the formalisation of a deal with the US and recent policy actions are pointing to stronger accommodative measures from economic authorities. Third, China’s economy is now bottoming and the initial trade agreement with the US provides more space for policy stimulus. ![]() Exogenous events are hence unlikely to produce a significant downturn over the coming quarters. Positive developments for investors include the US-China Phase 1 trade agreement, receding trade tensions between the US and traditional allies (Canada, Mexico, EU, Japan, South Korea), diminished risks of a hard Brexit and the moderation of anti-business sentiments in the US political agenda. This is due to both lower probabilities of risk materialization and lower potential impacts from eventual economic disruptions. Second, global headwinds in the form of political and geopolitical risks are subsiding. Therefore, tolerance for higher inflation will increase, effectively extending Goldilocks scenarios. Such an approach will likely be exported from the Fed to other major central banks. This is going to raise the bar for future interest rate hikes. Under the new approach, the Fed will target higher inflation in order to make up for years of subdued inflation. Previously, QNB noted the Fed would only target forward-looking inflation expectations, ignoring past inflation. Fed officials moved towards a new approach that targets “inflation symmetry” within the business cycle, i.e., periods of above target inflation are expected to offset periods of below target inflation. Moreover, the US Federal Reserve (Fed) is currently changing its monetary policy reaction function, i.e., the responsiveness of nominal policy rates to changes in inflation and output. This places a cap on wage growth and limits the prospects of inflation acceleration. Chances of a significant “inflation scare” are slim due to the persistence of secular deflationary forces, including globalization and the structural gap in the bargaining power between labour and capital. In QNB view, the Goldilocks scenario is likely to continue well into 2020 and it has laid out four reasons that underpin its position.įirst, major central banks are unlikely to reverse recently implemented accommodative measures. ![]() ![]() Downturn fears suddenly turned into a condition that is “just right.” But can the sweet spot continue for long? The index tracks investor sentiment about economic activity. This can be observed in the sharp rebound of the Sentix global aggregate economic index from a position that was negative and deteriorating to one that is positive and improving. Since then, the economic expansion cycle gained further support with almost all major asset classes rallying. There is little doubt that at some point in Q3 last year global recession/deflation fears were reversed by more aggressive monetary policy easing and positive developments in trade negotiations,” QNB said. “Goldilocks is therefore a comfortable scenario of persistent growth prospects with low downside risks. This is relevant as policy responses to inflation pressures coming from overheated economies have often caused both recessions and bear markets. In other words, an economy that is hot enough to propel or maintain earnings growth, but cool enough to keep monetary authorities from tightening policy. In macro terms, this translates into an ideal scenario of moderate growth with high employment and low inflation. “Like Goldilocks in the old British tale, most investors prefer an economy that resembles a good porridge, neither too hot nor too cold, but ‘just right’, QNB noted.
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