Recent Developments Affecting the Global Economy
Recent events have significantly impacted the economic landscape globally. Here’s a summary of some crucial updates:
- The CFO of Chinese telecom giant Huawei has been arrested in Canada: BBC
- Does Huawei’s arrest jeopardize the trade truce between Trump and Xi? Reuters
- US stock index futures experienced a sharp decline in early Thursday trading: Bloomberg
- Global greenhouse gas emissions are rising at an accelerating rate: NY Times
- The UK Parliament has restrained Prime Minister May’s Brexit plan. What’s next? Vox
- North Korea is reportedly expanding a long-range missile base, defying US expectations: Independent
- Former President George H.W. Bush was honored at a state funeral held at the National Cathedral: CBS
- One segment of the US yield curve inverted this week: Reuters
- According to the Fed’s Beige Book, the economy continues to grow, but there are notable headwinds: MW
- The yield on German 10-year bonds fell to 0.25% on Wednesday, marking the lowest level in over a year.
Cautious Economic Outlook for the US
Although the risk of a recession remains low in the US based on the latest economic data, market indicators suggest an increased likelihood of a slowdown in growth potentially leading to a downturn in 2019. While immediate contraction of output seems unlikely, various political and economic risks have led to a reassessment of the macroeconomic forecast for the upcoming year.
Market Reactions to Trade Concerns
Stocks have fallen sharply due to concerns over trade and the economic outlook: Reuters
China commits to act quickly on trade obligations to the US: BBC
Trump mentions there are no immediate plans to impose tariffs on German vehicles: NY Times
Republican senators have stated that the Saudi Crown Prince is responsible for the Khashoggi killing: The Hill
Former President George H.W. Bush is honored at his state funeral today: CNN
Political risks are projected to pose a significant threat to the global economy in 2019: Bloomberg
According to PMI data, Eurozone growth continued to decelerate in November: IHS Markit
The yield spread between 10-year and 2-year Treasury bonds has fallen to 11 basis points: CNBC
US Private Payrolls Show Signs of Economic Slowdown
The ADP’s estimate for US private payrolls in November suggests that economic activity may have peaked. Although the projected year-over-year increase, due on Dec. 6, aligns with healthy job creation, the trend indicates a slight deceleration likely to continue in the coming months. If payroll growth experiences a downturn, it would corroborate other economic indicators signaling a softer macroeconomic trend as compared to the robust gains seen earlier this year.
Global Market Index Risk Premium Slightly Rises
The anticipated risk premium for the Global Market Index (GMI) has increased to an annualized 4.6% in November, surpassing the previous month’s estimate of 4.5%. This outlook, which reflects the expected premium over the projected “risk-free” rate in the long run, pertains to a market-value-weighted portfolio encompassing all major asset classes.
Confusions in Trade Agreements
Trump’s advisors are finding it challenging to clarify the president’s trade deal with China: Bloomberg
OPEC is formulating a strategy to reduce oil output: Reuters
Congress is working to prevent a potential government shutdown: Politico
The French government is reportedly halting a controversial fuel tax increase: CNBC
EU lawyers claim the UK government can independently cease the Brexit process: CNN
Segments of the Treasury yield curve have inverted: MW
A Global Manufacturing PMI indicates diminished growth in November: IHS Markit
US construction spending has decreased for the third consecutive month in October: TT
The US Manufacturing PMI has edged down to a moderately strong growth pace in November: IHS Markit
The US ISM Manufacturing Index rose in November after reaching a five-month low: MW
November Example of Market Recovery
November provided some respite for various asset classes following the turmoil seen in October. Although losses were not entirely erased, a positive trend was noted in last month’s trading.
Updates on US-China Trade Relations
Trump has tweeted that China has agreed to lower tariffs on cars made in the US: Bloomberg
China reports its collaboration with the US in striving to eliminate all tariffs: Reuters
Trump aims to exit NAFTA before Congress approves its replacement: NY Times
Qatar has declared its withdrawal from OPEC: CNN
Manufacturing growth in the Eurozone has declined to its slowest pace in over two years: IHS Markit
Year-on-year inflation in the Eurozone has dipped to 2.0% in November after reaching a near six-year high: Reuters
Manufacturing activity in the UK improved slightly in November, yet overall sector growth remains subdued: IHS Markit
The Chicago PMI surged to an 11-month high in November: Chicago PMI
The yield spread between 10-year and 2-year Treasury bonds has fallen to 21 basis points, marking the lowest level since mid-September.
Book Recommendation
The Model Thinker: What You Need to Know to Make Data Work for You
By Scott E. Page
Essay by the author via Harvard Business Review
Understanding data is complex without models. While data can describe reality, it cannot determine the most effective decisions in isolation. For instance, if you observe that diverse teams consistently perform better, that’s intriguing. However, to derive insights from this, you need a model to explain how diversity improves decision-making. Such a hypothesis represents a model of reality.
While individual models can be effective, combinations of models yield even better results. This is why the most successful thinkers, precise predictors, and productive design teams utilize ensembles of models, which I refer to as “many-model thinkers.”
Research Insights on Factor Investing
Factor Investing: Get Your Exposures Right!
François Soupé (BNP Paribas Asset Management), et al.
This paper discusses the optimal construction of portfolios for equity factor investing. The initial section focuses on ensuring equity portfolios target specific factor exposures before imposing constraints. It demonstrates that such portfolios can be derived using mean-variance optimization with robust expected returns informed by factors. The study introduces a framework for crafting these robust expected returns and illustrates that targeted factor exposures are retained both before and after applying realistic constraints, such as long-only. Simpler methods may fail to achieve this.
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