At the end of 2018, global economic growth continued to slow. In the United States, the orders of capital goods ceased increasing in the fourth quarter. The progressive dissipation of the impact of the fiscal stimulus measures is likely to weigh on the growth dynamic of the world's largest economy in 2019.
At the end of 2018, global economic growth continued to slow. In the United States, pockets of weakness in the automobile and property sectors seem to have extended to capital goods, where orders ceased increasing in the fourth quarter. "The progressive dissipation of the impact of the fiscal stimulus measures is likely to weigh on the growth dynamic in 2019", indicates Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments. "In the eurozone, the manufacturing sector's activity index in December stood just above the 50-point threshold that separates expansion from contraction, far from the levels synonymous with robust growth seen at the start of 2018."
Federal Reserve's monetary policy tightening cycle could be entering its final phase
As expected, the US Federal Reserve continued to tighten its monetary policy at its last meeting in 2018, raising the target range for the federal funds rate by 25 basis points. Although the monetary policy committee maintained its assessment of the US economy's good health, with solid job gains and strong consumer spending, its members downwardly revised their forecasts for the number of interest rate hikes in 2019 from three to two, "suggesting that the monetary policy tightening cycle that the Federal Reserve embarked on in December 2015 could be entering its final phase", thinks the Luxembourgish economist. In Europe, the Governing Council of the European Central Bank kept its monetary policy unchanged at its last meeting in December.
Government bond yields ease further
The drop in oil prices, signs of a slowdown in the global economy and falling equity markets led to government bond yields easing further in December. The yield on the US 10-year Treasury note dropped. "Given the prospect of economic slowdown, government bond yields could continue to decline in the United States." In the eurozone, the budget agreement reached between Italy and the European Commission drove Italian bond yields lower, with Italy's 10-year yield falling. In Germany and in Spain, government bond yields also fell, despite already being very low. Only in France, it rose slightly. "Given their current low level, there would seem to be limited potential for eurozone bond yields to reduce further."
S&P 500 posts its worst December since 1931
Although December generally tends to be a fairly favourable period for equity markets, they corrected sharply at the end of the year. In the United States, the flagship S&P 500 posted its worst December since 1931. European and emerging equity markets also suffered significant falls, albeit less than that of the US market.
Guy Wagner, chief investment officer at BLI - Banque de Luxembourg Investments