BLACKROCK INVESTMENT INSTITUTE | FEBRUARY 2019

BlackRock macro dashboard

  • Commentary

     

    Feb. 19 – Financial conditions are a key driver of the growth outlook in 2019. Since Q4 2018, our BlackRock FCIs have tightened more than some commonly followed counterparts, pointing to a softer growth outlook. This is because our FCIs have interpreted the drop in government bond yields as a downgrade in market expectations of growth rather than a genuine growth-boosting easing of financial conditions.

    Yet since the start of the year, our FCIs have bounced on the decline in risk premia – both in equity and credit markets. In fact, our FCI for G3 economies – the US, eurozone and Japan – is now roughly in line with our Growth GPS. That suggests that the economic data now mostly reflect the possible downdraft from the tightening of financial conditions in the past few months. We see growth softening further this year but only to levels closer to long-term trend growth in the eurozone and above-trend in the US. That GPS signals that the expansion remains well supported.

    Our G7 Growth GPS slid further in the middle of February to its lowest levels since late 2016, led by the US, the UK and Italy. The US GPS drop was driven by exceptionally weak December retail sales. The UK fall was down to poor December manufacturing data. And in Italy, big data signals for household sentiment disappointed. Consensus views are still seeing more downside risk relative to current economic trends as implied by the Growth GPS.

    The Inflation GPS points to a steady inflation environment, allowing the Federal Reserve to switch gears on policy and adopt a wait-and-see stance on interest rates.

     

 
Our BlackRock financial conditions indicators (FCI) give a forward view of where our Growth GPS may head and are expressed in GDP terms. We improve on existing FCIs by stripping out financial market pricing that is tied to the growth outlook rather than risk premia. How it works: read more

The BlackRock G3 Growth GPS shows where the 12-month forward consensus GDP forecast for the US, eurozone and Japan may stand in three months’ time. The FCI shows the rate of G3 GDP growth based on its historical relationship with our Growth GPS. The FCI inputs include policy rates, government bond yields, corporate bond spreads, equity market valuations and exchange rates. The FCI has historically led changes in the Growth GPS.

Financial asset prices can both drive and be driven by the growth outlook. This problem of endogeneity (or reverse causation) means that taking a weighted average of unadjusted market prices – as some commonly used FCIs do – can give a misleading picture of financial conditions. We adjust the inputs into our FCIs to keep only the portion of financial asset prices such as real term premia that drive, rather than are driven, by growth news. We find that this improves our ability to estimate future growth.

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Regional comparison
The BlackRock Growth GPS aims to give a read on the growth outlook for G7 economies and China. It combines new sources of information – including internet searches and text mining of corporate calls – as well as a daily nowcast of traditional economic data. How it works: read more

For G7 countries the GPS (the green line in the charts below) shows where the 12-month consensus GDP forecast may stand in three months’ time for each economy. The blue line shows the current 12-month economic consensus forecast for each economy, based on forecasts reported by Consensus Economics. The nowcast (orange line) shows the GDP forecast based on our composite of traditional macroeconomic indicators. With the China GPS, we create a similar gauge of the three-month growth horizon but focus on the Caixin/Markit composite PMI because China’s official GDP target guides such forecasts and makes them less reflective of investor views on the economic outlook. Click the country flags to toggle between the nine countries we track. Click inside the charts to zero in on any time period.

The GPS builds on existing nowcasting models that exploit the information from dozens of macroeconomic indicators to forecast GDP growth – including realized activity, employment, sentiment and survey data. It draws on a wider set of information sources by incorporating proprietary big data insights from BlackRock’s Systematic Active Equity team. These include micro insights, such as consumer behavior captured through internet searches, and macro insights such as country business sentiment measured through the text-mining of corporate managers’ conference calls. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns.

The BlackRock GPS was developed by BlackRock Investment Institute and Systematic Active Equity. For full details, see Introducing the BlackRock GPS.

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China
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Eurozone
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Germany
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France
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Canada
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The BlackRock Inflation GPS aims to give a read on the outlook for core inflation in major economies. It combines new sources of information – text mining of mentions of inflation – as well as a unique daily nowcast of inflation based on a wide variety of price and wage data. How it works: read more

Our inflation GPS (the green line in the charts below) shows where core consumer price inflation may stand in six months’ time for each economy. The blue line shows the actual reported core consumer price inflation for each economy. Click the country flags to toggle between the nine countries we track. Click inside the charts to zero in on any time period.

The GPS models the relationship between rates of core inflation and a broad set of economic indicators including measures of slack, inflation expectations, and other inflation-related data such as business surveys and wages. It also incorporates a proprietary big data signal from BlackRock’s Systematic Active Equity team measured through text-mining of commentary on inflation.

The BlackRock GPS was developed by BlackRock Investment Institute and Systematic Active Equity. For full details, see Introducing the BlackRock GPS.

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United States: core CPI
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United States: core PCE
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Eurozone: core HICP
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UK: core CPI
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Japan: core CPI excluding tax
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Canada: core CPI
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