US Macro: Investment slowing, but consumption should hold up – Durable goods orders fell 1.6% mom in February, a bit better than consensus estimates of a 1.8% fall. The less volatile ex-transportation measure (which strips out lumpy aircraft orders) was broadly flat on the month at 0.1%, while on a year-on-year basis growth cooled to 3.3%, down from 4.6% in January (on a 3m/3m annualised basis, growth picked up to 1.0% from 0.1%). The print points to a further slowdown in business investment, and is consistent with our view that investment will slow sharply this year, which should bring growth back down towards trend. Indeed, we expect the trough in investment growth to happen in Q2, before recovering in the second half of the year (see our US Watch – Sharper slowdown, softer landing).
However, with consumer fundamentals remaining solid, and government spending picking up, we continue to see recession risk as low. Meanwhile, markets are pricing in around 20bp in rate cuts from the Fed by end-2019, although there has already been some repricing following yesterday’s strong ISM manufacturing PMI (markets were pricing more than 30bp in cuts late last week). Investors seem to be extrapolating the recent growth slowdown into the future and assuming a further loss of growth momentum. In our view, growth will stabilise at rates close to trend over the coming quarters. As such, there is scope for a further repricing as markets come around to the view that the risk of recession remains relatively low. Our base case is that the Fed keeps rates on hold at least until end-2020. (Bill Diviney)