The tyranny of divergences

The past week has delivered a stark reminder that the global economy is fracturing along fault lines that few predicted at the start of the year. Oil price volatility, central bank divergence, and a manufacturing recession in Europe are pulling the macro landscape in contradictory directions. We note that these divergences are not merely cyclical — they reflect structural shifts in how major economies are responding to the post-pandemic policy landscape.

DM growth: a tale of two halves

The US economy continues to defy gravity. The S&P 500 rose 0.8% this week, supported by stronger-than-expected retail sales data showing a 0.6% monthly gain. Consumer confidence ticked up to 104.2, above the 102.5 consensus. However, the manufacturing sector tells a different story — the ISM PMI fell to 48.2, marking the third consecutive month of contraction. The labor market added 215,000 jobs, but wage growth moderated to 3.8% y/y from 4.0%, suggesting the disinflation process continues, if slowly.

Europe presents a grimmer picture. The composite PMI fell to 49.7, dragged lower by Germany (47.1) and France (48.3). The ECB cut rates by 25bp to 2.50% and signaled further easing, but transmission to the real economy remains sluggish. The UK fared slightly better with GDP rising 0.1% in January, but the BoE held rates at 4.50%, highlighting the tension between weak growth and sticky services inflation at 5.0%.

EM resilience masks vulnerabilities

Emerging markets continued to show resilience, but under the surface, vulnerabilities are building. China's February data batch was mixed — industrial production rose 5.9% y/y (vs 5.3% expected), but retail sales disappointed at 4.0% (vs 4.2%). The PBoC held the LPR steady, reserving easing capacity for when the housing sector deterioration intensifies.

India's economy remains the standout performer, with the Nifty 50 up 2.1% and industrial production growth accelerating to 5.8%. Brazil, by contrast, is tightening aggressively — the BCB hiked 100bp to 14.25%, its fourth consecutive increase, as inflation expectations deanchored above 5%.

Cross-asset signals: mixed messages

Risk assets sent conflicting signals this week. The S&P 500 gained 0.8%, but the VIX remained elevated at 18.5, suggesting hedging demand is rising. US 10-year yields fell 8bp to 4.23%, reflecting growth concerns despite the equity rally. The DXY strengthened 0.4% to 103.85, pressuring EM currencies — the BRL weakened 1.2% and the ZAR fell 0.8%.

Gold rose 1.5% to ,180/oz, hitting a fresh all-time high. The move reflects real rate compression alongside geopolitical hedging as oil markets digest the Iran situation. Brent crude at .40 (+4.1%) is now at its highest since October, creating a stagflationary headwind for oil-importing economies.

Central bank landscape: still diverging

The week reinforced that central banks are on divergent paths. The Fed held steady, with Chair Powell noting that "we need to see more evidence" of disinflation before cutting further. Markets price just 50bp of cuts through year-end. The ECB, by contrast, signaled urgency — Lagarde highlighted "mounting downside risks to growth" and markets now price another 75bp of easing. The BoJ surprised no one by holding at 0.50%, but Governor Ueda's hawkish rhetoric suggests a July hike remains on the table.

What to watch next week

The coming week brings US PCE inflation data (consensus 2.6% y/y), eurozone flash CPI (expected 2.1%), and China's official PMIs. A hot PCE print would challenge the market's expectation of a June Fed cut, while soft eurozone inflation could accelerate ECB easing expectations. In EM, Turkey's CBRT meets with markets expecting another 250bp cut to 40%.