Stretching the cycle

Central banks have pivoted to easing. The record-long U.S. economic expansion is supported by healthy household spending and looks unlikely to morph into a deeper downturn any time soon.

Stimulus is here
G3 policy interest rates and estimated neutral rates, 1991-2019

There is no guarantee that any forecast made will come to pass.
Source: BlackRock Investment Institute, Federal Reserve, National Bureau of Economic Research and European Central Bank, with data from Datastream Refinitiv, September 2019. Notes: The chart shows our estimate of neutral rates (known as r-star) in nominal terms, adjusting for actual inflation, and the GDP-weighted nominal policy rates of the U.S., eurozone and Japan. The neutral rate is an estimate of the short-term rate that neither fosters nor hinders GDP growth. The neutral rates are estimates based on an econometric model from a July 2018 ECB working paper. We detailed our estimates of neutral rates in the November 2018 Macro and market perspectives.

Policy rates at major central banks are falling again, backing away from neutral rates. Central bank stimulus from an already loose policy stance should help sustain the expansion.

Easy does it
BlackRock G3 Growth GPS and FCI, 2015-2019

Source: BlackRock Investment Institute with data from Bloomberg and Consensus Economics, September 2019. Notes: The BlackRock Growth GPS shows where the 12-month forward consensus GDP forecast may stand in three months’ time. The orange line shows the rate of GDP growth implied by our financial conditions indicator (FCI), based on its historical relationship with our Growth GPS. The FCI inputs include policy rates, bond yields, corporate bond spreads, equity market valuations and exchange rates. Forward-looking estimates may not come to pass.

• Easier monetary policy has spurred a swift rebound in our financial conditions indictor (FCI).
• Growth expectations, highlighted by our G3 Growth GPS, are yet to reflect the significant easing of financial conditions. See more on our Macro dashboard.
• Persistent and intensifying trade uncertainty is holding back business spending, in our view.

Accommodative financing conditions underpin our belief that weakness in the global industrial sector is unlikely to lead to a broader economic downturn in the near term.

Market implication: We like U.S. equities and EM debt.

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