(04 September 2019) DAILY MARKET BRIEF 2：UBS cuts GDP forecasts; Fed rates to fall to 1%?

CIO had previously expected the US to expand 1.8%, China, 5.8%, and the Eurozone, 1%.

But the impact of the higher tariffs imposed by the US on Chinese goods – in stages on 1 September, 1 October and 15 December – will hit both consumers and companies by the first half of 2020.

"Effectively, the tariffs – if implemented – might push the US to the edge of a technical recession in the first half of 2020," Ricardo Garcia, Chief Economist, Eurozone, CIO, says. "For the US, some of these Chinese goods, such as laptops and smartphones, constitute hard-to-substitute products, and the resultant higher consumer prices are expected to weigh on consumption."

Exports from the Eurozone to the US and China will decline, and the expected easing measures on 12 September from the European Central Bank may not be enough to offset the trade shock.

"Going forward it will be increasingly harder for markets to price in additional monetary easing," Garcia says. "What's more, world trade is set to stagnate in the best-case scenario in the next 12 months, as long as tariffs are implemented."

The manufacturing sectors in Asia and the Eurozone have been languishing for months, but the latest numbers from Institute for Supply Management on Tuesday showed that US factory activity could also be contracting.

The ISM manufacturing Purchasing Managers’ Index fell to 49.1% in August, its first decline since 2016.

As the trade situation – and economic data – deteriorates, the Federal Reserve could take the benchmark funds rate down to 1% by the third quarter of 2020, UBS economists say in a note on Tuesday.

The federal funds rate was lowered to 2.25% - by 25 basis points – when the Federal Open Market Committee met on July 31, 2019.

While most FOMC members are skeptical that more easing is needed, UBS expects another cut of 25bps in September.

Fed chair Jerome Powell could make the case that the risk to the outlook and a weak global economic environment call for more accommodation, UBS' economists say.

"We think the FOMC will need to see deterioration in the data before making further moves," they add. "If our real side forecast is borne out, they will get that signal in Q1, likely leading them to ease again in March."

CIO is remaining underweight on global as well as Eurozone equities. The team believes that income-generating carry positions – such as select emerging market currencies – could perform well as central banks ease policy in response to weaker growth.

By UBS