Monetary policy normalization – gradual but staggered
The US Federal reserve (Fed) will hike rates further as price pressures increase.
Stubbornly low inflation suggests the European Central Bank (ECB) should be in no hurry.
The Bank of England (BoE) will keep it gradual.
Fed to hike further
"The tax reform will boost US growth this year"
Although deflation risks now seem a distant memory, the secular stagnation scenario still has some devotees. The slow response of inflation to buoyant growth highlights the absence of underlying price pressure – wages have barely increased despite unemployment falling below its long-term equilibrium level in several countries. Although cyclical factors are set to push inflation higher, structural forces are putting a brake on inflation worldwide.
US Federal Reserve (Fed) – hiking again. After a widely expected rate hike in March, the Fed is likely to normalize policy further. The FOMC revised its inflation projections a little higher this month but this was not enough to shift ITS balance of views from two rate hikes to three this year as opinions remain split.
Prefer short maturities. After a short-lived rally, US 10-year yields reversed course before hitting the 3% mark. Long-term inflation expectations are too well anchored to allow a steepening of the US yield curve. US bond yields could gain further ground this year but we wouldn’t expect a sizeable move. Although markets fear an inversion of the yield curve (often perceived as an early signal of recession), we see little risk of a downturn at present.
ECB and BoE move slower
"We see no rate hike before 2019 in the eurozone"
European Central Bank (ECB) – in slow motion. Inflation prints have continued to disappoint and the ECB’s 2% target may not be reached before 2020. Persistent economic slack will prevent inflation from rising significantly. This will help the ECB delay the removal of quantitative easing, although some board members are keen to move faster. The timetable for halting asset purchases is still sketchy and we expect the ECB to provide more guidance by the end of the first half. Given the its fears that further euro strength could weigh on growth and inflation, we expect the ECB will wait until December before stopping. Trade tensions may also slow economic activity. All in all, we do not expect a rate hike before H2 2019.
Bank of England (BoE) – no change for now. The BoE hiked rates in late November 2017 but has been on hold since. Although statements have not very hawkish, a rate hike remains a possibility this year. The BoE is uncomfortable with sharply negative real yields with such a resilient economy. However, they will only move very slowly. Short-term yields are sensitive to rising global rates while receding domestic inflation will put a cap on long-term yields.
Sources: SGPB, Bloomberg, 29/03/2018. Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.