Global investors need to take a chill pill as economic prospects are not as bleak as many fear, finds a new report from Avery Shenfeld, Chief Economist at CIBC.
"Prospects aren't as bleak as some now fear, and rates aren't going negative everywhere. Investors, need to be scanning for signs that the news ahead might be better rather than worse, and there are indeed some forces that might pave the way for at least less-bad news," said Shenfeld. "Take a chill pill, as things aren't as bad as you're hearing on the street."
He notes that while emerging market recessions, or in China's case, growth disappointments, have been front and centre in the global economic slowdown of the past year, there are some positive signs.
"The analogies that the bond market was relying on to price away almost all U. S. rate hikes in the next two years, and take 10-year rates below 2%, simply ignore too many of the facts on the ground. In recent days, we're seeing what could be the early signs of a reversal of that trend."
He adds that worries of negative interest rates in the U.S. are overblown. "Only weeks after the Fed hiked in December, we were being asked to assess the odds that America's central bank will eventually be pushed into negative rates. Increasingly, the analogy is being drawn to Japan, which had its own real estate and financial market shock way back in the early 1990s, from which it ended up being stuck in a zero rate policy, and now negative policy rates, for what seems like forever.
"We long ago projected that U.S. rates will track much lower than in past cycles but America isn't turning Japanese, not by a long shot. Nor is it sitting with a massive output gap like the one still festering in Europe, wounded by the Eurozone's failure to use fiscal stimulus during the Great Recession."
He does add that the market's assessment of Canada is rightly one of concern for near-term growth prospects. Just as fiscal policy differentiated the Eurozone's post-recession fate from that of the U.S., it will hold the cards for getting the Canadian economy back in gear.
"Monetary policy is a spent force here, given an indebted household sector and an aging housing boom. Look for the federal budget to deliver a larger fiscal boost than was talked about during the campaign as a way to avoid Canada having to turn Japanese in monetary policy ahead.”