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8July2019GlobalSalesandTradingpersonnelatMacquariearenotindependentand,therefore,theinformationhereinmaybesubjecttocertainconflictsofinterest,andmayhavebeensharedwithotherpartiespriortopublication.Note:TotheextentMacquarieResearchisreferenced,itisidentifiedassuchandtheassociateddisclaimersareincludedinthepublishedresearchreport.Pleaserefertotheimportantdisclosures(Australia)LimitedRicDeverell+61282324307ric.deverell@macquarie.comJustinFabo+61282320696justin.fabo@macquarie.comHaydenSkilling,CFA+61282322623hayden.skilling@macquarie.comMacquarieCapitalMarketsCanadaLtd.DavidDoyle,CFA+14168483663david.doyle@macquarie.comNeilShankar+14166075055neil.shankar@macquarie.comMacquarieCapitalLimitedLarryHu,PhD+85239223778larry.hu@macquarie.comIreneWu+85239223796irene.wu@macquarie.comLynnZhao+862124129035lynn.zhao@macquarie.comMelodyDong+862124129085melody.dong@macquarie.comMacquarieCapital(Europe)LimitedTomPrice+442030372849tom.price@macquarie.comVivienneLloyd+442030374530vivienne.lloyd@macquarie.comSerafinoCapoferri+442030372517serafino.capoferri@macquarie.comJimLennon,SeniorCommoditiesConsultant+442030374271jim.lennon@macquarie.comEimearDaly+442030374802eimear.daly@macquarie.comMacquarieBankLimitedSingaporeBranchGarethBerry+6566010348gareth.berry@macquarie.comMacquarieFuturesUSALLCThierryWizman+12122312082thierry.wizman@macquarie.comMacquarieBankLimitedHongKongBranchTrangThuyLe+85239222113trang.thuyle@macquarie.comThispublicationhasbeenpreparedbySalesandTradingpersonnelatMacquarieandisnotaproductoftheMacquarieResearchDepartment.GlobalEconomicandMarketsOutlook:Mid-YearUpdateTheTariffsandtheDamageDone…Thisyearmarksthe10thanniversaryoftheglobalexpansion,makingitthelongestinthepost-warperiod.WhileglobalGDPgrowthhasaveragedarespectable2¾%saar–apacesimilartotheaverageofthepast40years–inthemainithasfeltunfulfilling,ascentralbankshaveworked(mostlyunassistedbythepoliticalclasses)tosupportoutputinthefaceofnumerousstructuralheadwinds.Whilewedon’tthinkexpansionsdieofoldage,theongoingslowdown,alongwiththerecenttariffincreases,hasseenmarketsonceagaincontemplatethepossibilityofrecession.Thebig“knownunknown”isthepathofthetradewar.Whiletheprobabilityofafurtherescalationisdifficulttoassess,inourcentralscenarioweassumetheUSannouncesa10%tariffontheremainingimportsfromChinainSeptember,beforealonger-lasting“ceasefire”intheNewYear,justintimefortheUSelection(weseetheprobabilityofanH2escalationassomethinglike60%).Inthisworld,afterslowingtoaround2¼%saarinQ2,globalGDPgrowthislikelytodiptoalittlebelow2%byQ4,beforegraduallyrecoveringnextyear,asFedeasing,Chinesestimulus(weexpectanotherpushinearlyQ4)anddiminishedtradeuncertaintysupportactivity.Whiletheriskofrecessioncontinuestobuild–theNYFed’syieldcurve-basedmodelestimatesaprobabilityofaround30%–theslowdownstillfeelsmorelikearepeatof2012and2016thanthebeginningofsomethingmoresinister.Withtradeandindustrialproductionalreadyweak,however,theriskisthatbusinessinvestmentcontinuestoslowinthefaceofhighertariffsandpolicyuncertainty(ashasalreadyoccurredintheUKasBrexituncertaintyweighs).Businessescouldalsoslowhiring,whichinturncouldhitconsumption.WeexpecttheFedtocutthefedfundsratethreetimesoverthenext6months,whiletheECBwillcutthedepositrateby10basispointstominus50,andpossiblyrestartQE.Long-terminterestratesarelikelytofallmodestlyfurtherinH2,butthenmovealittlehigherover2020asgrowthrecovers.However,withgrowthintheUSexpectedtobearoundtrendnextyear,itisunlikelytheFedwillbeabletoreversethecutsaheadofthenextminidownturnthatcouldarrivesometimein2021,suggestinglimitedupsideforyields.HighertariffscouldseecurrencysafehavensbenefitinH2,withtheUSdollarandtheYentheprimebeneficiaries.However,astheyearcomestoanend,enthusiasmfora“weak”dollaramongtheUSpoliticalclassescouldbuild.Forcommoditymarketsthissuggestsfurtherdownwardpressureovertheremainderofthisyear,althoughasalwaysperformancewilldiverge,withgoldbenefitingfromtheuncertaintywhileironoreandcoppercomeunderpressure.Equitymarketsarealreadypricingrecovery,andcouldfeeldisappointedinthenextfewmonthsasgrowthslows.However,historysuggeststhatthemarketislikelytobesupportedbytheeconomicrecoveryin2020–oncetheFed“put”isinplay,equitiesonlyfallmateriallyiftheeconomytipsintorecession.GlobalEconomicandMarketsOutlook:Mid-YearUpdate8July20192ContentsGlobaleconomicoutlook:Intheeyeofthetariffstorm.....................................................................................3UnitedStates:Tradepolicyuncertaintyandslowergrowth..............................................................................9China:Stimuluscouldescalatelaterthisyear................................................................................................13Eurozone:ECBlift-offunlikelybeforethenextdownturn...............................................................................17Japan:Sustainedmonetaryaccomodationamidweakinflation.....................................................................20A