The European Central Bank (ECB) could review its forward guidance in coming quarters in response to stronger economic momentum, as a prelude to scaling back its asset purchases.
One more rate hike in the US. The Federal Reserve is likely to start reducing its balance sheet before year-end.
No change from the Bank of England (BoE). However, rising inflation may trigger a rate hike later this year.
Favour short maturities and inflation-linked bonds.
Fed to hike once more this year
"The Fed’s projection of three hikes in 2018 will be challenged if inflation struggles to gain traction and growth starts to weaken"
Despite weak inflation, the global recovery remains on track. The stronger growth witnessed recently in key advanced economies should lead in due course to even tighter labour markets and wage-related inflation.
Ultra-loose monetary policies are likely to be rolled back but much will depend on data – central banks are likely to err on the side of caution.
Prefer short maturities. Low inflation and slow growth in the US have pushed Treasury yields lower, dragging those on German Bunds and UK gilts in their wake. The yield gap with the US has been narrowing since mid-March and more could come as monetary policies in Europe begin to normalise and closing output gaps help inflation recover. We still prefer short-dated and inflation-linked bonds, although we recognise valuations are now less compelling.
Fed – one more rate hike. The Fed is firmly committed to hiking rates – it thinks the recent pullback in inflation is temporary and that policy conditions are overly accommodative. However, the Fed’s projection of three hikes in 2018 will be challenged if inflation struggles to gain traction and growth starts to weaken.
ECB and BoE changing tack
"The Bank of England has turned more hawkish to curb fast-growing credit growth."
ECB to shift stance. The European Central Bank (ECB) will likely think the balance of risks has improved following signs of stronger, more synchronised growth in the eurozone. However, the central bank should continue to provide strong stimulus as banks remain reluctant to lend to corporates.
Nonetheless, we expect the ECB to review its forward guidance and to adjust some policy parameters. We think the central bank will extend its asset purchases beyond December 2017 but at reduced volumes. The key deposit rate may also be raised although it will remain negative throughout 2018. Rising US rates are also likely to lift eurozone benchmark yields.
Bank of England – turning more hawkish. Weakness in sterling is still driving inflation higher, with a lag. However, shrinking purchasing power is weighing on private consumption, and economic activity more generally. This should deter the Bank of England from hiking rates, although they have adopted a more hawkish tone to curb excessive consumer credit growth.
Sources: SG Private Banking, Bloomberg, 30/06/2017. 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.