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CROSS ASSET WEEKLY
22.02.2019

The rally still has legs

Summary
Cross asset weekly pic
The slump in US retail sales in December did nothing to allay fears about the health of the global economy, and these concerns are unlikely to go away given that we expect the incoming activity data to remain weak in the near term. However, while the collapse in US consumer activity will keep Fed tightening off the agenda for a while longer, it was at odds with other retail indicators and the bigger picture is that consumers will benefit from lower energy prices and a buoyant labour market this year. As such, we do not expect the recent slump to last long. Meanwhile, the increase in credit growth in China last month means that another piece of the recovery story there is falling into place, as looser monetary policy begins to bear fruit. We continue to believe that China’s economy will stage a recovery during the course of 2019.
Weak incoming data may dent investor sentiment in the near term, but our expectations for the global economy are clearly all bullish for markets. As such, while we believe that equity markets will experience a short-term period of consolidation, we still see more upside in the first half of the year.
US inflation expectations as measured by breakeven rates have dropped as Treasury Inflation Protected Securities (TIPS) have underperformed lately. As expectations for the global economy improve in 2019, we would expect inflation expectations to increase again leading to a slight outperformance of TIPS relative to its nominal counterparts. That being said, given that we are at an advanced stage of the rate cycle, the scope for negative inflation surprises and hence for significant outperformance of TIPS is limited.

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