The rise in bond yields in developed economies in the past 6 weeks remains one of the over-riding themes as we head into the last seven days of the US presidential campaigns.
Markets are now fretting about the implications for global growth and asset valuations and ultimately whether elevated global risk appetite will correct more forcefully.
Higher international commodity prices, a pick-up in global GDP growth in Q3 and early Q4 and easing deflation fears suggest that interest rate policies in developed economies may have reached an important inflexion point – in line with the view I expressed six weeks ago.
Developed central banks may refrain from loosening monetary policy further near-term, with the exception of the RBNZ and possibly ECB. At the very least, policy-makers will tweak a discourse which has largely focused on doing “whatever it takes”.
Recent US data have paved the paved the way for a 14th December Fed hike, conditional on Democrat candidate Hilary Clinton wining the 8th November US presidential elections.
But with the exception of the Fed and possibly a handful of EM central banks, rate hikes are a story for the latter part of 2017 (perhaps) while further rate cuts remain on the cards in Brazil, Russia, Indonesia and India.
Higher global yields and still uncertain US election outcome are taming global equities and volatility has spiked but EM currencies have still managed to eek out modest gains.
Assuming Hilary Clinton wins next week, I would expect the initial reaction to be a rally in global equities, EM currencies and Dollar and an underperformance of safe-haven assets.
But I would also expect market pricing for a December Fed hike to rise a little further, which could in turn eventually curtail any rally in global equities and EM currencies.
In this scenario, the Dollar would likely end the year stronger, as per my January forecast of a third consecutive year of albeit more modest Dollar gains.
Whether global risk appetite avoids its early 2016 fate will depend on the interconnected factors of underlying macro data and the Fed’s credibility. In any case, market volatility could spike in the run-up to March 2017.
The self-reinforcing sell-off in Sterling and UK bonds has only very recently abated, with markets seemingly taken some comfort from a number of factors including the only modest slowdown in UK GDP growth to 0.5% qoq in Q3.
But optimism over UK GDP data is not warranted as growth has become more unbalanced and slowed in August-September despite a significant easing in UK monetary policy.
This monthly briefing highlights that financing conditions improve in euro area peripheral countries and in emerging economies, that the US economy bounces back after a difficult first quarter and that China’s first-quarter GDP growth is the slowest in two years.
For more information:
http://www.un.org/en/development/desa/policy/wesp/wesp_mb.shtml
Sticking to forecasts: Fed summer hike, Dollar hat-trick still on the cards, ...Olivier Desbarres
The Federal Reserve’s minutes of its 27th April policy meeting released last week set the tone for a possible June or July rate hike. On balance, recent US and global data are unlikely to have fundamentally changed the Federal Reserve’s view that a summer hike may be appropriate.
This is line with my long-held forecast that the Federal Reserve would likely hike once or twice this year, with the first hike in June. I recently updated my forecast to a July hike as it gives the Fed more time to assess US and global data and the result of the UK referendum on 23rd June. The risk is that the very threat of a hike derails financial markets sufficiently for the Federal Reserve to postpone its second-hike-in-a-decade to later this year.
Surprisingly, this message was seemingly absent from the wafer-thin policy statement the Federal Reserve issued on 27th April.
I maintain my January forecast that the dollar’s nominal effective exchange rate (NEER)[1] may well end the year slightly higher, propelled by the resilience of the US economy and the Federal Reserve going against the global trend of easier (or at least easy) monetary policy.
Conversely, the recent modest weakening in emerging market currencies is likely to extend, as per my prediction in early April. Macro data are too weak to reassure markets that any economy can single-handedly steady slowing global growth but strong enough for the Federal Reserve to force markets to reprice the risk of tighter US policy.
My core scenario has been that the UK would vote to remain in the EU and, if anything, that conviction has strengthened following recent surveys. The lifting of this uncertainty would see a reasonably competitive sterling appreciate, albeit modestly given the UK’s underlying structural deficiencies.
Ivo Pezzuto - FEDERAL RESERVE'S RATE RISE. COMING SOON? The Global Analyst Se...Dr. Ivo Pezzuto
This article, written on August 31st, 2015 by Prof. Ivo Pezzuto, predicts that mostly likely the Federal Reserve will hike interest rates at the December 16th-17th FOMC meeting, given the current global economic turbulence and outlook, and that a rate rise will be more likely at the end of 2015 or in early 2016 if the US economy will continue to improve and in the absence of systemic crises.
No UK rate hikes this year and room for further Euro upsideOlivier Desbarres
The odds of a 25bp Bank of England rate hike at next week’s policy meeting are all but dead in my view following tepid GPD growth of 0.3% qoq in Q2 2017.
Moreover, UK GDP growth and inflation dynamics, allied to forthcoming changes in the composition of the Monetary Policy Council, point to the record-low policy rate of 0.25% remaining on hold for the remainder of the year.
Forecasting European Central Bank (ECB) monetary policy, including the timing and modalities of changes to its Quantitative Easing program, is arguably a far trickier proposition.
While the ECB may be incentivised to slow the current rapid pace of Euro appreciation, at this stage I do not expect the ECB to try and to stop, let alone reverse, the Euro’s upward path.
This monthly briefing highlights that financing conditions improve in euro area peripheral countries and in emerging economies, that the US economy bounces back after a difficult first quarter and that China’s first-quarter GDP growth is the slowest in two years.
For more information:
http://www.un.org/en/development/desa/policy/wesp/wesp_mb.shtml
Sticking to forecasts: Fed summer hike, Dollar hat-trick still on the cards, ...Olivier Desbarres
The Federal Reserve’s minutes of its 27th April policy meeting released last week set the tone for a possible June or July rate hike. On balance, recent US and global data are unlikely to have fundamentally changed the Federal Reserve’s view that a summer hike may be appropriate.
This is line with my long-held forecast that the Federal Reserve would likely hike once or twice this year, with the first hike in June. I recently updated my forecast to a July hike as it gives the Fed more time to assess US and global data and the result of the UK referendum on 23rd June. The risk is that the very threat of a hike derails financial markets sufficiently for the Federal Reserve to postpone its second-hike-in-a-decade to later this year.
Surprisingly, this message was seemingly absent from the wafer-thin policy statement the Federal Reserve issued on 27th April.
I maintain my January forecast that the dollar’s nominal effective exchange rate (NEER)[1] may well end the year slightly higher, propelled by the resilience of the US economy and the Federal Reserve going against the global trend of easier (or at least easy) monetary policy.
Conversely, the recent modest weakening in emerging market currencies is likely to extend, as per my prediction in early April. Macro data are too weak to reassure markets that any economy can single-handedly steady slowing global growth but strong enough for the Federal Reserve to force markets to reprice the risk of tighter US policy.
My core scenario has been that the UK would vote to remain in the EU and, if anything, that conviction has strengthened following recent surveys. The lifting of this uncertainty would see a reasonably competitive sterling appreciate, albeit modestly given the UK’s underlying structural deficiencies.
Ivo Pezzuto - FEDERAL RESERVE'S RATE RISE. COMING SOON? The Global Analyst Se...Dr. Ivo Pezzuto
This article, written on August 31st, 2015 by Prof. Ivo Pezzuto, predicts that mostly likely the Federal Reserve will hike interest rates at the December 16th-17th FOMC meeting, given the current global economic turbulence and outlook, and that a rate rise will be more likely at the end of 2015 or in early 2016 if the US economy will continue to improve and in the absence of systemic crises.
No UK rate hikes this year and room for further Euro upsideOlivier Desbarres
The odds of a 25bp Bank of England rate hike at next week’s policy meeting are all but dead in my view following tepid GPD growth of 0.3% qoq in Q2 2017.
Moreover, UK GDP growth and inflation dynamics, allied to forthcoming changes in the composition of the Monetary Policy Council, point to the record-low policy rate of 0.25% remaining on hold for the remainder of the year.
Forecasting European Central Bank (ECB) monetary policy, including the timing and modalities of changes to its Quantitative Easing program, is arguably a far trickier proposition.
While the ECB may be incentivised to slow the current rapid pace of Euro appreciation, at this stage I do not expect the ECB to try and to stop, let alone reverse, the Euro’s upward path.
Is it time to buy the U.S. in early June?
An oil and materials price bottom is fully in. That is bullish risk. The S&P500 can finish 2016 above 2200, which is a +5%
return. Another big positive: A U.S. 5.0% unemployment rate adds consumer momentum via pending wage pressure. This
builds incomes.
U.S. shares have recovered. Watch for bullish S&P500 breaks of 2,100 in June or later.
Before the Aug. 2015 sell-off, the S&P500 traded at 16.6x forward earnings vs. a 10-year average of 14.1x. The Feb index
traded at 15.2. The June 2016 index trades at 16.7x forward earnings. Bearishly, we trade a bit above valuation levels of
August 2015.
Zacks strategists still call an S&P500 at 2,200 to 2,300 by yearend, given a 15% chance of U.S. recession (including me).
Olivier Desbarres - Hawkish Pendulum May Have Swung Too FarOlivier Desbarres
I have long argued that the risk of a collapse in global economic growth and inflation was over-stated and more recently that major central banks had likely reached an important inflexion point.
A global recession and global deflation have seemingly been averted and central bank policy rate cuts and extensions of quantitative easing programs have become rarer occurrences.
Donald Trump’s election has turbo-charged expectations that reflationary US-centric policies will drive global, and in particular US growth and inflation in 2017, that the Fed’s hiking cycle will step up a gear and that US yields and equities and the dollar will climb further, heaping pressure on emerging economies and asset prices.
But analysts and markets may now be getting ahead of themselves.
My core reasoning is that US inflation may not rise as fast expected, due to lags in the implementation of Trump’s planned fiscal policy loosening and immigration curbs, residual slack in the US labour market and disinflationary impact of higher US yields and a stronger dollar.
As a result, the FOMC, which will see important personnel changes in early 2017, may argue that the market has already done some its work and not be as hawkish as expected.
In this scenario, US short-end rates could lose ground while long-end rates continue to push higher, resulting in a steepening of a still not very steep US rates curve.
One corollary is that factors which have wakened the euro may lose traction as 2017 progresses.
So far Sterling and Japanese and European equity markets have borne the brunt of the initial shock, while the FTSE is down only 3.3% since Thursday and most major and emerging market currencies have been reasonably well behaved (see Figure 1).
But there are still far many more questions than answers and the situation remains extremely fluid.
For starters there is no precedent for a country leaving the EU and thus no clear-cut rulebook to rely on. The government has limited institutional capacity to start negotiations with the UK’s 27 EU partners until Article 50 of the Lisbon Treaty is triggered and no timeline has been provided for when this will happen (assuming it is triggered at all).
Perhaps unsurprisingly given the mammoth task ahead, the Leave campaign leaders have been very short on specifics regarding the mechanics and timing of the UK’s exit from the EU, the likely shape of future trade treaties and national policies such as immigration. Prime Minister Cameron’s de-facto resignation and wholesale changes in personnel in the opposition Labour Party are adding to the head-scratching.
Moreover, it is not one country seeking to leave the EU, but a union of four countries – England, Wales, Scotland and Northern Ireland – which further complicates matters as both Scotland and Northern Ireland seem intent on remaining part of the EU and potentially breaking free from the UK.
At this point in time, all we can do is take stock of what we know (or at least we think we know) and what we don’t know (but can tentatively try to forecast).
I would conclude, as I did in Europe – the Final Countdown (21 June 2016), that the many layers of political, legal, economic and financial uncertainty are likely to keep UK investment, consumption and employment, as well as Sterling on the back-foot for months to come. Financial market volatility is also likely to remain elevated in coming weeks.
In this context the US Federal Reserve is likely to keep rates on hold in coming months and the European Central Bank can probably afford to do little for the time being. The Bank of England is likely to seriously contemplate cutting its policy rate while the Bank of Japan will be under renewed pressure to curb soaring Yen strength.
Of course, British policy-makers and business associations have come out and said the right things in order to limit the carnage and contagion. But they have far more limited room to reflate the economy and fade gyrations in financial markets than they did during the 2008-2009 great financial crisis. They are not in control at this juncture and it is not obvious who is.
Frequent u-turns in the Fed’s policy stance, central banks’ lack of monetary policy credibility, currency wars and gyrations in macro data are being blamed for financial market volatility and record lows in government bond yields. The forthcoming EU referendum has also buffeted UK financial markets.
But on the whole, financial markets and macro data have since 1 April showed a far greater degree of stability than in preceding quarters.
US interest rate, equity and currency markets have weathered the gyrations in the Fed’s policy stance and the ebbs and flows in US data. German and Japanese government bond yields have fallen but ultimately been less volatile than in Q1. The World Equity Index has also been constrained in a reasonably narrow range, thanks at least in part to signs that global GDP growth stabilised in Q1.
This relative stability has not been confined to the dollar. So far, Q2 2016 has been the least volatile quarter since January 2015 – as defined by the low-high range using daily data – for most major nominal effective exchange rates (NEERs). These include developed and EM currencies, as well as commodity and non-commodity currencies. Among G7 currencies, the euro NEER has been particularly stable in a 2.1% range.
The picture is also one of relative calm in emerging markets, with the pick-up in foreign capital inflows in April and June and in commodity prices since March helping to stabilise EM currencies without central banks having to draw on still significant FX reserves.
Commodity prices, including crude oil, have risen sharply so far in Q2 but their volatility has remained in line with historical standards, particularly in recent weeks. This has contributed to greater stability in commodity currencies, with the exception of the Australian dollar.
If anything, this lack of directionality has forced financial market players to be light-footed and adopt short-term tactical strategies. The question now is whether this relative calm is here to stay or whether it augurs more violent corrections as was the case earlier this year.
The UK referendum on EU accession has the potential to be far more destabilising to financial markets than the BoJ’s policy meeting on 16 June and in particular the Fed’s meeting the day before. While UK markets would likely feel the brunt of a decision to leave the EU, the euro would also likely weaken and global equity markets conceivably sell off.
The Fed’s policy meeting on 27th July could also prove disruptive at a time of potentially reduced summer-liquidity.
UK retail sales in Q1 likely contracted from Q4 2016, despite their rebound in February.
Falling real wages and slowing household borrowing are likely to further dampen retail sales and consumption growth going forward.
The still large pool of available workers is seemingly limiting their wage-bargaining power, with nominal wage growth falling behind rising inflation.
Moreover, investment growth is still only making a negligible contribution to GDP growth ahead of the British government’s decision to trigger Article 50 on 29th March.
Much of the rise in inflation in recent months is attributable to imported inflation driven by Sterling’s depreciation since November 2015 with little evidence of demand-led inflation.
This situation is reminiscent of 2007-2008 when Sterling’s collapse fuelled imported and in turn headline inflation.
Should Sterling remain broadly unchanged going forward, its year-on-year pace of depreciation, currently around 9%, would slow from June onwards and hit zero towards end-year according to my estimates, in turn dampening imported inflation.
I would expect retailers to stabilise prices to maintain market share in the face of tepid demand and for wage-inflation expectations to remain modest. This was certainly the case in the 12 months to September 2009 with CPI-inflation falling from 5.2% yoy to 1.1% yoy.
The question is whether the BoE is willing to look beyond a potentially temporary rise in UK inflation – as Governor Mark Carney suggested – or whether it tries to short-circuit any self-reinforcing rise in prices.
My base-line scenario is that the BoE will look beyond the current rise in UK inflation, unless at least one of three conditions materialise:
(1) Nominal wage growth accelerates, comfortably outstripping headline inflation and driving consumption growth;
(2) Commercial bank lending picks up significantly; and
(3) Sterling depreciates materially from current levels, exacerbating imported and in turn headline inflation.
I expect that neither (1) or (2) will materialise any time soon and that while risks to Sterling are probably to the downside, Sterling is unlikely to weaken sufficiently to push the BoE into hiking. I would however expect it to keep a possible rate hike firmly on the table.
The Fed kept rates on hold yesterday – pretty much a done deal – and its statement yesterday following its two-day policy meeting was very short on new insights.
But it was in line with my expectation that while the Fed would present a marginally less dovish assessment of the global economy, it would paint a still cloudy picture of the US and nurse the recently faltering rally in global risk appetite. US equities closed up 0.3% yesterday and 2, 5 and 10yr US treasury yields are down 6-10bps since Tuesday.
The Fed faces seven rocky weeks ahead of its 15th June meeting. It will likely want to keep the door ajar for a hike and will therefore not want to see US yields break out of range. But the market’s violent reaction today to the BoJ’s unchanged monetary policy is also a stark reminder that an overly-hawkish Fed could derail global risk appetite and in turn delay any Fed hikes.
With this in mind, my core scenario of a June is likely to be tested in coming weeks and the risk remains that flat-lining emerging market currencies will come under pressure.
This is Western Union Business Solutions October edition of the global currency outlook, providing you and your business with invaluable market insight and visibility of key risk events.
The Federal Reserve is unlikely to hike its policy rate from 0.25-0.50% at its 16th March 2016 meeting and may have little choice but to revise down its expectations to around 3 hikes for 2016 in its accompanying projections. In the 16th December “dot-chart”, the median expectation among the 10 voting Federal Open Market Committee (FOMC) members and 7 non-voting members was for four hikes this year (the weighted average was for a slightly less hawkish 91bp of hikes).
The recent correction in global financial markets has left developed market equities about 10% cheaper and emerging market equities 25% cheaper, removing a lot of the valuation froth that was evident.
Commenting in Novare Investments’ economic report for the third quarter of 2015, Francois van der Merwe, Head of Macro Research, said: “We expect global equities to be supported by continued accommodative monetary policies, soft inflation and a moderate global economic recovery.
Is it time to buy the U.S. in early June?
An oil and materials price bottom is fully in. That is bullish risk. The S&P500 can finish 2016 above 2200, which is a +5%
return. Another big positive: A U.S. 5.0% unemployment rate adds consumer momentum via pending wage pressure. This
builds incomes.
U.S. shares have recovered. Watch for bullish S&P500 breaks of 2,100 in June or later.
Before the Aug. 2015 sell-off, the S&P500 traded at 16.6x forward earnings vs. a 10-year average of 14.1x. The Feb index
traded at 15.2. The June 2016 index trades at 16.7x forward earnings. Bearishly, we trade a bit above valuation levels of
August 2015.
Zacks strategists still call an S&P500 at 2,200 to 2,300 by yearend, given a 15% chance of U.S. recession (including me).
Olivier Desbarres - Hawkish Pendulum May Have Swung Too FarOlivier Desbarres
I have long argued that the risk of a collapse in global economic growth and inflation was over-stated and more recently that major central banks had likely reached an important inflexion point.
A global recession and global deflation have seemingly been averted and central bank policy rate cuts and extensions of quantitative easing programs have become rarer occurrences.
Donald Trump’s election has turbo-charged expectations that reflationary US-centric policies will drive global, and in particular US growth and inflation in 2017, that the Fed’s hiking cycle will step up a gear and that US yields and equities and the dollar will climb further, heaping pressure on emerging economies and asset prices.
But analysts and markets may now be getting ahead of themselves.
My core reasoning is that US inflation may not rise as fast expected, due to lags in the implementation of Trump’s planned fiscal policy loosening and immigration curbs, residual slack in the US labour market and disinflationary impact of higher US yields and a stronger dollar.
As a result, the FOMC, which will see important personnel changes in early 2017, may argue that the market has already done some its work and not be as hawkish as expected.
In this scenario, US short-end rates could lose ground while long-end rates continue to push higher, resulting in a steepening of a still not very steep US rates curve.
One corollary is that factors which have wakened the euro may lose traction as 2017 progresses.
So far Sterling and Japanese and European equity markets have borne the brunt of the initial shock, while the FTSE is down only 3.3% since Thursday and most major and emerging market currencies have been reasonably well behaved (see Figure 1).
But there are still far many more questions than answers and the situation remains extremely fluid.
For starters there is no precedent for a country leaving the EU and thus no clear-cut rulebook to rely on. The government has limited institutional capacity to start negotiations with the UK’s 27 EU partners until Article 50 of the Lisbon Treaty is triggered and no timeline has been provided for when this will happen (assuming it is triggered at all).
Perhaps unsurprisingly given the mammoth task ahead, the Leave campaign leaders have been very short on specifics regarding the mechanics and timing of the UK’s exit from the EU, the likely shape of future trade treaties and national policies such as immigration. Prime Minister Cameron’s de-facto resignation and wholesale changes in personnel in the opposition Labour Party are adding to the head-scratching.
Moreover, it is not one country seeking to leave the EU, but a union of four countries – England, Wales, Scotland and Northern Ireland – which further complicates matters as both Scotland and Northern Ireland seem intent on remaining part of the EU and potentially breaking free from the UK.
At this point in time, all we can do is take stock of what we know (or at least we think we know) and what we don’t know (but can tentatively try to forecast).
I would conclude, as I did in Europe – the Final Countdown (21 June 2016), that the many layers of political, legal, economic and financial uncertainty are likely to keep UK investment, consumption and employment, as well as Sterling on the back-foot for months to come. Financial market volatility is also likely to remain elevated in coming weeks.
In this context the US Federal Reserve is likely to keep rates on hold in coming months and the European Central Bank can probably afford to do little for the time being. The Bank of England is likely to seriously contemplate cutting its policy rate while the Bank of Japan will be under renewed pressure to curb soaring Yen strength.
Of course, British policy-makers and business associations have come out and said the right things in order to limit the carnage and contagion. But they have far more limited room to reflate the economy and fade gyrations in financial markets than they did during the 2008-2009 great financial crisis. They are not in control at this juncture and it is not obvious who is.
Frequent u-turns in the Fed’s policy stance, central banks’ lack of monetary policy credibility, currency wars and gyrations in macro data are being blamed for financial market volatility and record lows in government bond yields. The forthcoming EU referendum has also buffeted UK financial markets.
But on the whole, financial markets and macro data have since 1 April showed a far greater degree of stability than in preceding quarters.
US interest rate, equity and currency markets have weathered the gyrations in the Fed’s policy stance and the ebbs and flows in US data. German and Japanese government bond yields have fallen but ultimately been less volatile than in Q1. The World Equity Index has also been constrained in a reasonably narrow range, thanks at least in part to signs that global GDP growth stabilised in Q1.
This relative stability has not been confined to the dollar. So far, Q2 2016 has been the least volatile quarter since January 2015 – as defined by the low-high range using daily data – for most major nominal effective exchange rates (NEERs). These include developed and EM currencies, as well as commodity and non-commodity currencies. Among G7 currencies, the euro NEER has been particularly stable in a 2.1% range.
The picture is also one of relative calm in emerging markets, with the pick-up in foreign capital inflows in April and June and in commodity prices since March helping to stabilise EM currencies without central banks having to draw on still significant FX reserves.
Commodity prices, including crude oil, have risen sharply so far in Q2 but their volatility has remained in line with historical standards, particularly in recent weeks. This has contributed to greater stability in commodity currencies, with the exception of the Australian dollar.
If anything, this lack of directionality has forced financial market players to be light-footed and adopt short-term tactical strategies. The question now is whether this relative calm is here to stay or whether it augurs more violent corrections as was the case earlier this year.
The UK referendum on EU accession has the potential to be far more destabilising to financial markets than the BoJ’s policy meeting on 16 June and in particular the Fed’s meeting the day before. While UK markets would likely feel the brunt of a decision to leave the EU, the euro would also likely weaken and global equity markets conceivably sell off.
The Fed’s policy meeting on 27th July could also prove disruptive at a time of potentially reduced summer-liquidity.
UK retail sales in Q1 likely contracted from Q4 2016, despite their rebound in February.
Falling real wages and slowing household borrowing are likely to further dampen retail sales and consumption growth going forward.
The still large pool of available workers is seemingly limiting their wage-bargaining power, with nominal wage growth falling behind rising inflation.
Moreover, investment growth is still only making a negligible contribution to GDP growth ahead of the British government’s decision to trigger Article 50 on 29th March.
Much of the rise in inflation in recent months is attributable to imported inflation driven by Sterling’s depreciation since November 2015 with little evidence of demand-led inflation.
This situation is reminiscent of 2007-2008 when Sterling’s collapse fuelled imported and in turn headline inflation.
Should Sterling remain broadly unchanged going forward, its year-on-year pace of depreciation, currently around 9%, would slow from June onwards and hit zero towards end-year according to my estimates, in turn dampening imported inflation.
I would expect retailers to stabilise prices to maintain market share in the face of tepid demand and for wage-inflation expectations to remain modest. This was certainly the case in the 12 months to September 2009 with CPI-inflation falling from 5.2% yoy to 1.1% yoy.
The question is whether the BoE is willing to look beyond a potentially temporary rise in UK inflation – as Governor Mark Carney suggested – or whether it tries to short-circuit any self-reinforcing rise in prices.
My base-line scenario is that the BoE will look beyond the current rise in UK inflation, unless at least one of three conditions materialise:
(1) Nominal wage growth accelerates, comfortably outstripping headline inflation and driving consumption growth;
(2) Commercial bank lending picks up significantly; and
(3) Sterling depreciates materially from current levels, exacerbating imported and in turn headline inflation.
I expect that neither (1) or (2) will materialise any time soon and that while risks to Sterling are probably to the downside, Sterling is unlikely to weaken sufficiently to push the BoE into hiking. I would however expect it to keep a possible rate hike firmly on the table.
The Fed kept rates on hold yesterday – pretty much a done deal – and its statement yesterday following its two-day policy meeting was very short on new insights.
But it was in line with my expectation that while the Fed would present a marginally less dovish assessment of the global economy, it would paint a still cloudy picture of the US and nurse the recently faltering rally in global risk appetite. US equities closed up 0.3% yesterday and 2, 5 and 10yr US treasury yields are down 6-10bps since Tuesday.
The Fed faces seven rocky weeks ahead of its 15th June meeting. It will likely want to keep the door ajar for a hike and will therefore not want to see US yields break out of range. But the market’s violent reaction today to the BoJ’s unchanged monetary policy is also a stark reminder that an overly-hawkish Fed could derail global risk appetite and in turn delay any Fed hikes.
With this in mind, my core scenario of a June is likely to be tested in coming weeks and the risk remains that flat-lining emerging market currencies will come under pressure.
This is Western Union Business Solutions October edition of the global currency outlook, providing you and your business with invaluable market insight and visibility of key risk events.
The Federal Reserve is unlikely to hike its policy rate from 0.25-0.50% at its 16th March 2016 meeting and may have little choice but to revise down its expectations to around 3 hikes for 2016 in its accompanying projections. In the 16th December “dot-chart”, the median expectation among the 10 voting Federal Open Market Committee (FOMC) members and 7 non-voting members was for four hikes this year (the weighted average was for a slightly less hawkish 91bp of hikes).
The recent correction in global financial markets has left developed market equities about 10% cheaper and emerging market equities 25% cheaper, removing a lot of the valuation froth that was evident.
Commenting in Novare Investments’ economic report for the third quarter of 2015, Francois van der Merwe, Head of Macro Research, said: “We expect global equities to be supported by continued accommodative monetary policies, soft inflation and a moderate global economic recovery.
While equity and commodity markets have recovered, it is an almost consensus view that already tepid global economic growth in H2 2015 likely weakened furthered in Q3 and shows few signs of recovering near-term,
Governments, lacking in both leadership and fiscal-reflation headroom, have passed the buck to central banks struggling to hit multiple growth, inflation and financial stability targets.
However, talk of global recession let alone economic collapse is somewhat overdone and I reiterate my long-held view that the global growth story is a cause for concern, not panic (17 December 2014).
Standpoint: Global Reflation by Kevin Lings STANLIB
Fears of sustained deflation and stagnant growth in the United States and Europe have been replaced by a more optimistic growth outlook as well as concerns about rising inflation. This has driven developed market equities higher, but also weakened major bond markets.
Degroof Petercam Asset Management's chief economist and asset allocator look into whether the reflation trade is for real and inflation is back in the cards.
Olivier DEsbarres: What to expect in 2016 – same, same, but worseOlivier Desbarres
It is clear that markets so far this year are trading on sentiment, more specifically fear, with hard-data playing second fiddle. Or more accurately, price action suggests that markets are focusing on disappointing December numbers (e.g. US ISM) or even reasonably uneventful data (Chinese manufacturing PMI) and ignoring strong data such as U.S non-farm payrolls, Chinese services PMI and exports (see Figure 1). The hit-and-miss approach of Chinese policy-makers to stabilise equity markets (and ultimately growth) have done little to restore confidence. I nevertheless flag in Figure 37 some of the key data and events to focus on this year.
US GDP data weakest of a disappointing lot
Data released today show that Q1 2017 real GDP growth:
In the US slowed to 0.7 quarter-on-quarter (qoq) annualised, from 2.1% qoq in Q4 2016 – the weakest growth rate in three years (see Figure 1);
In the UK halved to 0.3% qoq – the weakest growth rate in a year;
In France slowed to 0.3% qoq from 0.5% qoq in Q4 2016; and
In Spain rose to 0.8% qoq from 0.7% qoq in Q4 2016.
In the past week European and global politics, strong US growth data, mixed global macro numbers and eurozone, Chinese and Indian central bank policy have eclipsed Trump-mania.
What is perhaps more remarkable is markets’ reasonably benign, “risk-on” reaction, bar the euro’s sell-off in the wake of today’s ECB policy meeting.
One interpretation is that markets have become complacent to the risks presented by President Trump’s constellation of pseudo-policies, surging nationalism in Europe, the UK’s uncertain economic future and continued capital outflows from China.
I have a somewhat different take, namely that markets are rightly discounting some of the more extreme and perverse scenarios, including:
Protectionist US policies coupled with higher US yields and a strong dollar collapsing tepid emerging market, and eventually global, economic growth;
The “no” vote in the Italian referendum leading to the economic collapse of the European Union’s third largest economy;
Surging European nationalism culminating in the collapse of the eurozone and/or European Union;
The British government opting to sacrifice growth in exchange for a hard version of Brexit and;
Capital outflows from China ultimately forcing policy-makers into accepting a Renminbi collapse and shocking a corporate sector with significant dollar-debt.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
The SVB Asset Management Economic Report, Q1 2017, is a review of and outlook on economic and market factors that impact global markets and business health.
In this edition, the team discusses the Fed's recent activity and its intentions to raise benchmark interest rates three times in 2017. The report also focuses on how the new U.S. administration will impact domestic and global economies.
The Fed left its policy rate unchanged at 0.25-0.50%, as expected, and the 10 voting Federal Open Market Committee (FOMC) members and 7 non-voting members halved their median expectations of rate hikes in 2016 from four to two in their updated projections (see Figure 1). The Fed’s statement, projections and press conference had an undeniably cautious tone, with clear focus on global risks. The rally in US equities (to a new 2016-high) and 2-year rates (to a March low) and further depreciation in the dollar post meeting clearly indicate markets’ dovish interpretation (see Figure 2).
Olivier desbarres what you may have missed and why it mattersOlivier Desbarres
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Our monthly economic review is intended to
provide background to recent developments in
investment markets as well as to give an
indication of how some key issues could impact in
the future.
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The world of search engine optimization (SEO) is buzzing with discussions after Google confirmed that around 2,500 leaked internal documents related to its Search feature are indeed authentic. The revelation has sparked significant concerns within the SEO community. The leaked documents were initially reported by SEO experts Rand Fishkin and Mike King, igniting widespread analysis and discourse. For More Info:- https://news.arihantwebtech.com/search-disrupted-googles-leaked-documents-rock-the-seo-world/
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A personal brand exploration presentation summarizes an individual's unique qualities and goals, covering strengths, values, passions, and target audience. It helps individuals understand what makes them stand out, their desired image, and how they aim to achieve it.
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Sustainability has become an increasingly critical topic as the world recognizes the need to protect our planet and its resources for future generations. Sustainability means meeting our current needs without compromising the ability of future generations to meet theirs. It involves long-term planning and consideration of the consequences of our actions. The goal is to create strategies that ensure the long-term viability of People, Planet, and Profit.
Leading companies such as Nike, Toyota, and Siemens are prioritizing sustainable innovation in their business models, setting an example for others to follow. In this Sustainability training presentation, you will learn key concepts, principles, and practices of sustainability applicable across industries. This training aims to create awareness and educate employees, senior executives, consultants, and other key stakeholders, including investors, policymakers, and supply chain partners, on the importance and implementation of sustainability.
LEARNING OBJECTIVES
1. Develop a comprehensive understanding of the fundamental principles and concepts that form the foundation of sustainability within corporate environments.
2. Explore the sustainability implementation model, focusing on effective measures and reporting strategies to track and communicate sustainability efforts.
3. Identify and define best practices and critical success factors essential for achieving sustainability goals within organizations.
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1. Introduction and Key Concepts of Sustainability
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4. Sustainability Implementation & Best Practices
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Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
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Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
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𝐓𝐉 𝐂𝐨𝐦𝐬 (𝐓𝐉 𝐂𝐨𝐦𝐦𝐮𝐧𝐢𝐜𝐚𝐭𝐢𝐨𝐧𝐬) is a professional event agency that includes experts in the event-organizing market in Vietnam, Korea, and ASEAN countries. We provide unlimited types of events from Music concerts, Fan meetings, and Culture festivals to Corporate events, Internal company events, Golf tournaments, MICE events, and Exhibitions.
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"𝐄𝐯𝐞𝐫𝐲 𝐞𝐯𝐞𝐧𝐭 𝐢𝐬 𝐚 𝐬𝐭𝐨𝐫𝐲, 𝐚 𝐬𝐩𝐞𝐜𝐢𝐚𝐥 𝐣𝐨𝐮𝐫𝐧𝐞𝐲. 𝐖𝐞 𝐚𝐥𝐰𝐚𝐲𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞 𝐭𝐡𝐚𝐭 𝐬𝐡𝐨𝐫𝐭𝐥𝐲 𝐲𝐨𝐮 𝐰𝐢𝐥𝐥 𝐛𝐞 𝐚 𝐩𝐚𝐫𝐭 𝐨𝐟 𝐨𝐮𝐫 𝐬𝐭𝐨𝐫𝐢𝐞𝐬."
1. 1
Be careful what you wish for
The rise in bond yields in developed economies in the past 6 weeks remains one of the
over-riding themes as we head into the last seven days of the US presidential campaigns.
Markets are now fretting about the implications for global growth and asset valuations and
ultimately whether elevated global risk appetite will correct more forcefully.
Higher international commodity prices, a pick-up in global GDP growth in Q3 and early Q4
and easing deflation fears suggest that interest rate policies in developed economies may
have reached an important inflexion point – in line with the view I expressed six weeks ago.
Developed central banks may refrain from loosening monetary policy further near-term,
with the exception of the RBNZ and possibly ECB. At the very least, policy-makers will
tweak a discourse which has largely focused on doing “whatever it takes”.
Recent US data have paved the paved the way for a 14th December Fed hike, conditional on
Democrat candidate Hilary Clinton wining the 8th November US presidential elections.
But with the exception of the Fed and possibly a handful of EM central banks, rate hikes are
a story for the latter part of 2017 (perhaps) while further rate cuts remain on the cards in
Brazil, Russia, Indonesia and India.
Higher global yields and still uncertain US election outcome are taming global equities and
volatility has spiked but EM currencies have still managed to eek out modest gains.
Assuming Hilary Clinton wins next week, I would expect the initial reaction to be a rally in
global equities, EM currencies and Dollar and an underperformance of safe-haven assets.
But I would also expect market pricing for a December Fed hike to rise a little further, which
could in turn eventually curtail any rally in global equities and EM currencies.
In this scenario, the Dollar would likely end the year stronger, as per my January forecast
of a third consecutive year of albeit more modest Dollar gains.
Whether global risk appetite avoids its early 2016 fate will depend on the interconnected
factors of underlying macro data and the Fed’s credibility. In any case, market volatility
could spike in the run-up to March 2017.
The self-reinforcing sell-off in Sterling and UK bonds has only very recently abated, with
markets seemingly taken some comfort from a number of factors including the only modest
slowdown in UK GDP growth to 0.5% qoq in Q3.
But optimism over UK GDP data is not warranted as growth has become more unbalanced
and slowed in August-September despite a significant easing in UK monetary policy.
2. 2
A blast from a distant past – Rising yields
The rise in global government bond yields, particularly at the long-end of the maturity spectrum, remains
one of the over-riding themes as we head into the last seven days of the US presidential campaigns. Figure
1 shows that 2-year, 5-year and 10-yields yields have risen in the US, Germany and Australia by on
average 13bp, 8bp and 14bp, respectively, since mid-September. The rise in Japanese yields has been far
more timid, with 10-year rates actually a little lower in the past six weeks.
Figure 1: Government bond yields have risen across the maturity curve in US, Germany, UK and Australia
Source: investing.com
Policy-makers and markets for so long concerned about the threat of global deflation and depressed yields
are now fretting about the implications of higher yields for global growth and asset valuations and ultimately
whether elevated global risk appetite will correct more forcefully.
A number of common and interconnected factors have driven yields higher in most developed markets. The
(admittedly unsteady) rise international energy and commodity prices, including for crude oil, copper, iron
ore and Nickel, and signs that global GDP growth picked up slightly in Q3 have eased deflation fears –
fears which I had argued last year were overdone (see Deflation, what deflation?, 15 September 2015).
This has in turn shed greater light on signs that interest rate policies in developed economies may have
reached an important inflexion point – very much in line with the view I expressed six weeks ago (see
Global central bank easing nearing important inflexion point, 16 September 2016).
-5
0
5
10
15
20
25
30
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40
2yr 5yr 10yr Average
US Germany Japan UK Australia
Change in government bond yields since 16 September 2016 (basis points)
3. 3
Global GDP growth inching higher
My core view was, and still is, that eight years of ultra-low (and in some cases negative) central bank policy
rates and expansive bond-buying programs have helped stabilise global economic growth and inflation,
albeit at low levels, and there are early signs that both are inching higher. At the same time, the costs of
ultra-loose monetary policy, including asset price bubbles, distortions in bond markets, pressure on the
banking sector and even rising inequality, may be starting to outweigh the benefits.
Global GDP growth likely increased incrementally in Q3 2016 after having stabilised around 2.8% year-on-
year (yoy) in Q2. My estimate is derived from the rise in the global manufacturing PMI from 50.2 in Q2 to
50.9 in Q3 (see Figure 2) and preliminary GDP figures for the US, European Union, China, Korea and
Mexico which in aggregate account for two-thirds of world GDP (see Figure 3). This ties in with my
September forecast that “global GDP growth may have risen to around 2.9% yoy in Q3 based on global
manufacturing PMI data for July-August”.
Moreover, strong country PMI data for October, including in China (highest level since July 2014), Russia
(4-year high) and India (22-month high), provide an early sign that global GDP growth picked up further in
early Q4. Monthly global manufacturing PMI data, released months before official GDP figures, continue to
be a reliable forward indicator of global GDP growth yet receive only ephemeral market attention.
Figure 2: Manufacturing PMI data had pointed to
first increase in global growth since Q4 2013…
Figure 3: …and data for major economies further
confirm modest global growth pick-up
Source: IMF, national statistics offices, Markit Source: IMF, national statistics offices
Developed central banks at inflexion point
Therefore, developed central banks may refrain from loosening monetary policy further near-term, with the
exception of the Reserve Bank of New Zealand (RBNZ) which markets expect to deliver one final 25bp cut
at its policy meeting on 10th
November, and possibly the ECB.
2.0
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3.0
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4.0
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Global manufacturing PMI, left scale
Global real GDP, % year-on-year
(IMF methodology)
0
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3
4
5
6
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8
US
(25%)
EU
(22%)
China
(15%)
Korea
(2%)
Mexico
(1.5%)
Total
Q2 2016
Q3 2016
Real GDP, % year-on-year
(figure in brackets is share of world GDP)
4. 4
Figure 4: Rate cutting cycles coming to an end in developed economies but still room for EM policy rate cuts
Source: National centralbanks
Since April, developed central banks have only delivered four 25bps policy rate cuts – the Reserve Bank of
Australia (RBA) in May and the RBA, RBNZ and Bank of England (BoE) in August. I would expect policy
rate cuts and expansions/extensions to QE current programs to become increasingly rare (see Figure 4). At
the very least, the world’s most influential central bankers may going forward tweak a discourse which has
in recent years largely focused on doing “whatever it takes”.
Australia: The RBA at its policy meeting today was seemingly intent on making clear that it sees no
compelling reason to cut rates further given expectations of a pick-up in economic growth and
inflation medium-term.
Eurozone: My core scenario since September has been that the ECB would keep it policy rates on
hold and the modalities of its current QE programs unchanged until its 8th
December policy meeting
and so far the ECB has stayed on script. Stable eurozone GDP growth of 1.6% yoy in Q3 and the
rise in CPI-inflation to a 27-month high of 0.5% yoy in October have, if anything, reduced the
probability of the ECB extending its QE program, which expires in March 2017, before end-year.
UK: I am sticking to the view which I have held since late-August that there is little room or need for
the BoE to either cut or hike its policy rate or extend its current QE program (see UK economy post
referendum – for richer but mostly for poorer, 26 August 2016). Q3 GDP data did not provide a
compelling case for the BoE to change its current course of monetary policy. Moreover, with Sterling
and UK yields having stabilised for now, the already weak case for BoE intervention in the FX
market has now all but evaporated (see below for a more detailed discussion).
Norway: The Norges Bank, which on 26th
October again kept its policy rate of 0.5% unchanged,
has adopted a neutral stance. It noted on the one hand the positive impact of higher oil prices on the
0
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4
5
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8
9
Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16
Number of cuts Number of hikes
Major central bank policy meeting interest rate decisions
5. 5
oil-exporting Norwegian economy and slight rise in expected policy rates among trading partners but
lower inflation on the other hand. The Norges Bank’s real policy rate – the policy rate deflated by
headline or core CPI-inflation – remains very low relative to history and to other developed central
banks. But with inflation on a downtrend and GDP growth of only 1.3% yoy in H1 2016, policy rate
hikes are probably not on the cards any time soon.
Fed will hike rates on 14th December…assuming Hilary Clinton wins presidential elections
The elephant in the room is still the US Federal Reserve policy meeting on 14th
December, with US macro
data in the past year having proved a major hurdle for the Fed to clear.
But the rebound in US GDP growth in Q3 to 2.9% annualised, decent September macro data and higher
international oil prices have in my view paved the way for a second consecutive December rate hike.
Importantly, growth in private sector aggregate weekly payrolls rebounded in September to 4.3% yoy from
a multi-year low of 3.5% yoy in August and retail sales, ISM manufacturing and non-manufacturing and
most measures of inflation measures also bounced back (see FX update: Dollar, Sterling and EM, 17
October 2016).
My forecast of a 25bp hike remains conditional on Hilary Clinton wining the 8th
November US presidential
elections (see Federal Reserve – the Father Christmas of central banks, 23 September 2016). Her victory
is a necessary, if not sufficient condition for the Fed to hike in my view, despite Fed Chairperson Yellen’s
assertion that the Fed is apolitical. Perhaps it is not totally coincidental that the market’s current pricing of a
75% probability of a 25bp hike in December is similar to the estimated probability of Clinton winning next
week’s presidential elections according to FiveThirtyEight (which accurately forecast the voting outcome of
all 50 states in the 2012 US presidential elections).
Rate hikes still very much the exception, not the norm
To be clear, bar the Fed and possibly a handful of EM central banks still fighting weak currencies and/or
high inflation, no major central bank is likely to hike policy rates or tighten monetary policy in coming
months, in my view. That’s a story for the latter part of 2017 (perhaps). Even the Fed has repeatedly
stressed that any future rate hikes would be modest and gradual, a point it will likely reaffirm regardless of
whether it decides to hike rates in December.
Since April 2016 only two major central banks have hiked their policy rates – Nigeria (in July) and Mexico
(in June and September). Banco de Mexico could opt to stay on hold if the peso nominal effective
exchange rate (NEER), which has appreciated 4.3% in the past six weeks, benefits from a Clinton victory
and survives a December Fed hike.
During that period, emerging market central banks have delivered 14 policy rate cuts, in line with my
forecast last year that EM central banks would continue cutting their policy rates (see More EM central
banks to join rate-cutting party, 30 September 2015). Even since August 2016, major EM central banks
have delivered five rate cuts, broadly as I had expected (see Right or wrong further central bank rate cuts
still on the cards, 19 August 2016).
6. 6
With central banks’ real policy rates still high in Brazil, Russia, Indonesia and India, further rate cuts remain
on the cards, particularly in Brazil and Russia where GDP growth is weak. These countries’ central banks
may admittedly want to first gage the impact of the US elections and a possible Fed hike on their currencies
before cutting rates further.
Dollar hat-trick, EM currencies choppy
Higher global yields and the still uncertain US presidential election outcome have perhaps unsurprisingly
been a headwind for global equities unchanged from six weeks ago (see Figure 5) while volatility has again
spiked (see Figure 6) – a pattern which has so far matched my expectation that “In this context higher
volatility is likely to prevail and global risk appetite may struggle to forcefully regain traction for now”.
Figure 5: Global equities are unchanged since
mid-September
Figure 6: After a brief respite, VIX has again
spiked higher as US elections loom
Source: investing.com Source: investing.com
A GDP-weighted basket of emerging market currencies has been treading water versus the US Dollar and
has depreciated slightly if the weaker Chinese Renminbi is included (see Figure 7). But this partly reflects
the Dollar’s strength and a basket of emerging market NEERs (excluding the CNY) has appreciated about
1.5% since mid-September (see Figure 8). Commodity and high-yielding emerging currencies, including the
Brazilian Real, Mexican Peso, Russian Rouble and South African Rand, have outperformed other
currencies by significant margins – understandably given the backdrop of higher international commodity
prices and rising developed market yields.
340
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430
Oct 15 Jan 16 Apr 16 Jul 16 Oct 16
MSCI All-Country Index
10
12
14
16
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20
22
24
26
28
May 16 Jul 16 Sep 16 Nov 16
CBOE S&P 500 Volatility Index (VIX)
7. 7
Figure 7: EM currencies struggling to make gains
versus robust Dollar…
Figure 8: …but stronger against their trading
partners’ currencies
Source: investing.com, BIS Source: investing.com, BIS
But the next six weeks could prove pivotal for global equities and EM currencies. Let’s assume that Hilary
Clinton wins the 8th
November US presidential elections – a reasonable assumption given her still modest
lead over Donald Trump in the majority of polls. I would expect the initial reaction to be:
A rally in global equities;
US Dollar appreciation, particularly against other majors including the Euro and Sterling. This would
likely suit the ECB and BoE just fine, with both central banks seemingly intent on at least keeping
their currencies near current levels in order to support domestic economic growth;
An appreciation in the currencies of EM economies reliant on trade with the US, including the
Mexican Peso and Brazilian Real, given concerns that Donald Trump would opt for a less open US
economy, and;
An underperformance of safe-haven assets, including gold.
But I would also expect market pricing for a December Fed rate hike to rise a little further (from 21bp
currently), which could in turn eventually curtail any rally in global equities and EM currencies. Assuming no
exogenous shocks between the US elections and 14th
December and that the Fed hikes its policy rate
25bp, I would expect:
Broad-based USD appreciation;
Other major central banks to be more inclined to maintain their stance on monetary policy and policy
rate cuts to be less frequent;
EM currencies and global equities to struggle to hold onto post-US election gains.
65
66
67
68
69
81
82
83
84
85
Apr 16 Jun 16 Aug 16 Oct 16
Including CNY, left scale
Excluding CNY
GDP-weighted basket of Emerging Market
currencies vs USD (23 April 2010 = 100)
73
74
75
76
77
78
79
80
81
95
96
97
98
99
100
Dec 15 Feb 16 Apr 16 Jun 16 Sep 16
Including CNY
Excluding CNY (right scale)
GDP-weighted basket of Emerging Market
nominal effective exchange rates (April 2010 =
8. 8
Figure 9: Higher US yields and stronger Dollar
moving in tandem…
Figure 10: …while inverse relationship in UK is
more akin to an emerging market
Source: investing.com, Federal Reserve Source: investing.com, Bank of England
Volatility will key metric in Q1 2017
Net-net, in this scenario, the Dollar NEER – which is now up 0.2% on the year for the first time since March
based on Federal Reserve currency weights (see Figure 9) – would likely end the year stronger, as per my
January forecast of a third consecutive year of albeit more modest Dollar gains (see What to expect in 2016
– same, same but worse, 19 January 2016).
The Fed will certainly want to avoid a repeat of Q1 2016 when global equities and EM currencies sold off
and the Dollar appreciated sharply following the Fed’s December 2015 hike. The probability of this scenario
materialising once again will, in my view, depend on two sets of interconnected factors: underlying macro
data and the Fed’s credibility.
If US macro data in early 2017 take a turn for the worse, markets may query the suitability of the Fed’s hike
in December 2016 and global risk appetite could come under pressure. Even if US and global data prove
resilient, markets will look to the Fed for reassurance that the Fed’s hiking cycle will continue to be slow
and gradual. I would therefore expect FOMC members at the 14th
December meeting to further revise down
their estimates of the appropriate policy rate as they did at their December 2015 meeting. Their success in
communicating this message to a market sensitive to even the most benign Fed utterance will be a key
determinant of whether global appetite risk appetite corrects in the weeks following 14th
December.
Volatility in Fed fund futures and market pricing is thus likely to remain fluid in early 2017 and, in any case,
market volatility could spike in the run-up to March 2017 as this will mark:
The Federal Reserve’s policy meeting on 15th
March with Q&A session hosted by Chairperson
Yellen and updated FOMC forecasts;
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1.6
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Apr 15 Aug 15 Dec 15 Apr 16 Aug 16
USD nominal effective exchange rate (23
April 2010 = 100)
US yields, average 2s-5s-10s, % (right scale)
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
90
95
100
105
110
115
120
Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16
Sterling Nominal Effective Exchange Rate
Average of 2, 5 & 10yr UK bond yields, %
(right scale)
9. 9
The end of the ECB’s QE program, assuming it is not extended in December; and
British Prime Minister Theresa May’s self-imposed deadline to trigger Article 50 which officially sets
in motion the 2-year timeframe for the UK to leave the EU.
UK bond prices and Sterling finding their footing after multi-week pounding
The case of the UK is somewhat unique as the far larger jump in yields (than in other developed
economies) has gone hand in hand a collapse in Sterling, as per Figure 10 (See Sterling: The lady’s not for
turning (yet!), 14 October 2016), a co-existence one would normally associate with emerging markets. A
large UK account deficit allied to concerns about the UK’s future relationship with the EU have seen
investors shy away from long-Sterling positions, with Sterling’s depreciation in turn raising fears of imported
inflation and acting as a headwind to foreigners’ gilt purchases, putting further pressure on the currency.
This self-reinforcing sell-off in Sterling and UK bonds has only very recently abated (see Figure 10).
Markets have seemingly taken some comfort from a number of factors, including:
Mark Carney’s announcement yesterday that he would extend his stay as BoE Governor until June
2019, easing speculation as to whether government criticism of his tenure would see him stay only
until 2018;
Nissan’s decision to maintain its UK car plant, in exchange for somewhat opaque government
promises regarding the future of the UK’s automotive industry and the UK’s broader relationship
with the EU; and
The only modest slowdown in UK GDP growth to 0.5% quarter-on-quarter in Q3 from 0.7% in Q2
(seasonally adjusted), as shown in Figure 11.
Optimism over UK GDP growth not warranted
However, I would argue that the positive spin surrounding these GDP data is not fully justified, for a number
of reasons:
1. This is the first estimate of Q3 GDP growth (data content is less than half of the total required for the
final output estimate) and will likely be subject to (albeit usually minor) revisions. The second and
final estimates are due to be published on 25th
November and in late-December, respectively.
2. Growth, if anything, became even more imbalanced in Q3. All of the growth came from services,
which account for 79% of national GDP and rose 0.8% qoq in Q3. The index of production (15% of
national GDP) contracted 0.4% qoq and thus subtracted 0.05 percentage points (pp) to headline
GDP growth (see Figure 12). In comparison, in the previous six quarters production had on average
added 0.07pp to headline growth. Similarly construction output (6% of national GDP) fell 1.4% qoq
and subtracted 0.09pp to headline GDP. In the previous six quarters it had added 0.04pp (I omit
from these calculations the agricultural sector which accounts for only 0.7% of UK GDP).
10. 10
3. About 70% of the GDP growth in Q3 materialised in July when presumably the effects of the
referendum result had yet to kick in, according to my estimates using monthly Office for National
Statistics data. As Figure 13 shows, in July the index of services was up 0.4% mom, the index of
production was flat on the previous month and construction output was up 0.5% mom. But growth in
all three sectors slowed sharply in August and only rebounded marginally in September based on
ONS forecasts and early responses to its September Monthly Business Survey. If growth rates in
these three sectors did not pick up in October and do not pick up in November and December, real
GDP growth in Q4 will likely be far slower than in Q3.
Figure 11: UK GDP growth in Q3 did not slow as
much as had been feared…
Figure 12: …but economic growth if anything has
become more imbalanced…
Source: Office for National Statistics Source: Office for National Statistics
4. Even if we assume GDP growth remains stable at 0.5% qoq for the next four quarters, which I would
in itself query (see below), the UK’s real GDP will be 1% lower in a year’s time than if the economy
had continued to grow at 0.7% qoq.
5. It is conceivable that GDP growth could have picked up in Q3 had the British electorate voted to
stay in the EU. After all global GDP growth rose in Q3 to around 2.9% yoy from 2.8% yoy in Q2
according to my estimates.
6. UK GDP growth slowed despite the BoE cutting its policy rate 25bp, introducing a new term-funding
scheme and re-launching quantitative easing at its policy meeting on 4th
August 2016.
7. But most importantly UK GDP growth slowed despite a significantly more competitive currency.
While September trade data will only be released on 9 November, Figure 14 suggests that while the
Sterling NEER depreciated about 17% between November 2015 and end-September 2016 the UK’s
goods and services trade deficit is unlikely to have narrowed much in Q3 (see Barbarians at the
Sterling gate, 7 October 2016). If true, net trade will have made only a small positive contribution to
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
2012
Q1
2012
Q4
2013
Q3
2014
Q2
2015
Q1
2015
Q4
2016
Q3
UK real GDP, quarter-on-quarter % change
(seasonally adjusted)
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Production Construction Services
Average previous 6 quarters
Q3 2016
Contribution to UK GDP growth,
percentage points
11. 11
GDP growth in Q3, the extent of which will be revealed when second and third estimates of Q3 GDP
are released.
At the same time a weaker Sterling is driving domestic inflation higher. So UK households have borne
the costs of a weaker currency, including higher inflation (which is eating into already tepid real wage
growth) and a significant haircut to their wealth (when expressed in foreign-currency terms) but have yet
to see the potential benefits as GDP growth has slowed, not accelerated. Moreover, the outlook for UK
growth is not particularly encouraging in my view. Uncertainty over the UK’s future relationship with the
EU is likely to continue weighing on domestic and foreign investment in the UK while the scope for
interest rate and fiscal policy easing is limited.
Figure 13: …and July accounted for about 70% of
UK GDP growth in Q3 2016
Figure 14: UK GDP growth slowed in Q3 despite
significantly more competitive Sterling
Source: Office for National Statistics (Table 2)
Note: * Monthly growth rates for production,
construction and services are weighted according to
these three sectors’ size relative to national GDP.
Source: Office for National Statistics, Bank of England
-0.1
0.0
0.1
0.2
0.3
0.4
Jul-16 Aug-16 Sep-16
Index of production
Construction output
Index of services
Total
Month-on-month % change in UK sectors*
5
6
7
8
9
10
11
12
13
14
90
94
98
102
106
110
114
118
Dec-13 Oct-14 Aug-15 Jun-16
Sterling NEER (23 April 2010 = 100), left
scale
UK goods and services trade deficit 3-month
moving sum, seasonally ajusted (£ bn)