Last week we developed a framework to help investors map the competing forces at work in the global economy. The main conclusions are:
– The global economy would be vulnerable if contagion from the current trade spat spreads into the broader business sector and softens employment conditions. U.S. (and euro area) consumers will not remain resilient if employment demand is undermined.
– Monetary reflation can buy some time for a trade deal to emerge, but would be powerless to prevent an economic fallout and equity bear market if the trade war persists, let alone escalates.
– The optimistic outcome is that trade tensions dissipate, yet the Fed maintains a dovish tilt and manages to keep bond yields from rebounding materially.
– The cycle is late but this scenario could lead to a final mini blow-off in global equities, much like a muted version of the late-1990s. This would also be in President Trump’s best political interest, but there is still ample room for policy mistakes.