Expectations for global inflation continue to decrease as deflationary pressure mount. This indicated that the Fed will unlikely be challenged by suspected inflation over 2% target. The ECB in reactions slashed its 2019 forecast for both economic growth and inflation. Yet this might be a bit too late as the ECB is clearly behind the curve on this one. Market based measure indicate an elevated risk of a recession. German 10 year bond yields have decline to near zero perhaps the strong signal that European growth outlook is extremely weak. In addition, European equities are now tracking a similar pattern seen during the last recession between mid-211 and early 2013. EU economy growth remains positive with a quarterly GDP pace of 0.4% (1.6% annualized quarterly basis) suggesting the economic downturn currently is not deep. EU composite purchasing managers index (PMI) has decelerated from 58 to current reading of 51.9 (still above the 50 divide line).
Through the 2011-13 recession the PMI trended around 46, indicating a recession. European stocks have stage an impressive recovery bounce outpacing the most optimist EU analyst. Stocks recent recovery reflects optimize for economic stability however, increasing risk of a real recession could lead to further market declines. There are plenty of developments that could tip Europe into a necessary path. UK anticipated “Brexit”, leadership changes this year in Europe, including the head of the ECB and trade discussion of US led auto tariffs. European stocks have priced in a harder growth environment, which may leave them better equipped than other developed markets that are near their historical highs. There are some reassuring signs of progress, more volatility ahead if Europe’s economy fails to right itself.