By Akane Otani and Joe Wallace
Investors puzzling over conflicting signals about the health of
the global economy that sent markets sliding in recent trading will
get a new set of clues this week in the form of key economic data
from the U.S. and other wealthy nations.
Fourth-quarter gross domestic product readings from the U.S.,
U.K., France and Canada could enlighten the debate over whether the
global economy is in the midst of a temporary dip or headed toward
a more serious downturn.
The U.S., which releases a revised fourth-quarter GDP estimate
Thursday, is of special concern to investors looking for signs that
a slowdown in global growth is worsening. Economists at JPMorgan
Chase expect a revised GDP estimate of 1.8%, well below the 2.6%
growth estimate released by the Bureau of Economic Analysis a month
earlier.
A considerably lower U.S. GDP estimate would suggest that the
world's largest economy is more vulnerable than previously thought,
intensifying fears of a broader slowdown.
Worries about global growth have set financial markets in the
U.S. and Europe on edge. For much of this year, major stock indexes
had climbed, lifted by signs that central banks would put aside
their rate-increase campaigns for the foreseeable future. But that
relief has seemingly given way to fear.
Following further downbeat economic data from Europe on Friday,
investors say they are grappling with the possibility that the
global economy's momentum is worsening faster than they had
expected.
"You have some concerns out there about big political issues
like Brexit and the U.S. trade dispute with China, neither of which
are being resolved and both of which even seem to be
deteriorating," said Larry Hatheway, head of investment solutions
and chief economist at GAM Investments.
"Now there's a sense that what's happening elsewhere -- that the
U.S. won't be completely immune to it, even though it's a more
closed economy and is on a stronger footing," he said.
In one sign of the growing pessimism, traders have begun betting
the U.S. Federal Reserve will not only have to hold rates steady
but lower them to support the economy. Federal-funds futures on
Friday showed the market pricing in a 56% chance of at least one
rate cut in 2019, compared with 11% one month ago, according to CME
Group.
In another sign, the yield on 10-year German government bonds
fell below zero Friday for the first time since 2016. Meanwhile,
the yield on the 10-year U.S. Treasury note slipped to its lowest
since the start of 2018.
Much of the market's pivot appeared to begin Friday, after data
pointed to a worse-than-expected pullback in eurozone manufacturing
activity, amplifying concerns about the health of the European
economy. Major indexes on both sides of the Atlantic slumped to end
the week.
The moves underscored concerns about whether central banks'
easy-money policies will be enough to avert a deeper pullback, many
say.
On one hand, data in the U.S. continue to point to an economy
that remains on strong footing. Sales of previously owned homes
soared in February at the fastest pace since 2015, data released
Friday showed. Corporate earnings are expected to grow overall for
the year, and labor market figures show businesses hiring at a
healthy clip.
But economies across Europe and China have shown signs of
further deterioration, leaving investors wondering whether weakness
there could eventually have a ripple effect around the world.
"Expectations of a strong stock market seem to be ebbing," said
George Gero, managing director at RBC Capital Markets.
To be sure, some of the market moves Friday may have stemmed
from investors taking profits after a long streak of stock gains,
money managers said.
The S&P 500 remains up 12% for the year, on course for its
best quarterly gain since 2012. Stock indexes in Europe, Hong Kong
and Shanghai also are logging double-digit percentage gains.
The steep slide in bond yields also may have been exaggerated by
investors unwinding bets on their rise, said Mr. Hatheway, who
added that he didn't intend to pick up government debt that still
looked "very, very expensive."
Still, with few signs that economic momentum is set for an
imminent rebound, the market rout could intensify, other investors
cautioned.
Christopher Stanton, chief investment officer at Sunrise Capital
Partners, purchased futures contracts on Thursday that would rise
in value if market volatility shot higher, as it did on Friday. Mr.
Stanton believes the volatility is likely to continue as investors
question whether central banks will be able to sufficiently boost
economic growth in a slowdown.
"It seems like the market is coming to the conclusion that the
Fed has backed itself into a corner," he said.
The challenges central bankers face appear to be even more
severe in the eurozone given its greater exposure to China and
reluctance to raise government spending, strategists said.
The European Central Bank has limited power to boost growth
there given that monetary policy remains extremely loose, said
Alain Bokobza, head of global asset allocation and equity strategy
at Société Générale.
In contrast, the Fed appears to have plenty of firepower: its
target short-term interest rate is well above zero, he said, but it
has signaled it will only take meaningful action if there is a very
bad batch of data.
Still, some investors are holding out hope that economic
activity, while looking set to lose some momentum in the first half
of the year, will perk up in the second half -- supporting further
gains for markets.
Michael Kelly, global head of multiasset at PineBridge
Investments, expects the current global slowdown won't last much
longer than the end of spring. Beijing has taken action to halt
China's downturn, and U.S. companies that have delayed investment
during the trade conflict will put spending plans into action if
there is a resolution, he said.
"If markets are weak again next week, we could be on the buy
side," Mr. Kelly said.
--Ira Iosebashvili contributed to this article
Write to Akane Otani at akane.otani@wsj.com
(END) Dow Jones Newswires
March 24, 2019 16:27 ET (20:27 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.