Macro Insights

Paris, 12/06/2017

 

Fed set to hike rates this week

  • Fed to hike rates while the ECB paves the way for a gradual exit; global political developments continue to overshadow economic data.
  • ECB paves the way for gradual exit. While leaving its interest rates unchanged, the ECB dropped the possibility of “lower” levels of key interest rates from its forward guidance. It kept the sequencing indication that QE would be tapered before interest rates would be increased (reference to rates at current levels “well past the horizon of the net asset purchases”). Looking ahead, we expect that with stable above-potential growth and a gradual pick-up in core inflation, the ECB should announce in September a slowdown in the pace of its asset purchases in 2018, from €60bn per month to €40bn in the first six months.
  • A potential landslide victory for Macron’s party amid a political twist in Italy. The first round of the French parliamentary elections which took place on Sunday placed President Macron’s party first nationwide. This must be confirmed in the second round but En Marche! is now in a position to win a large majority in the Lower House (about 400 out of 577 seats according to projections). In Italy, the proposed “German-like” proportional system for the new electoral law has been falling apart since last Wednesday, once again raising uncertainty around potential snap elections, while the Five Star Movement (M5S) suffered a major blow as its candidates crashed out in many cities during the weekend’s local elections.
  • UK election defies polls to remove the outright majority for the ruling Conservative Party. This questions the direction of domestic policy and increases the chances of a “chaotic” Brexit as outlined in our recent research paper. PM Theresa May meets the 1922 Committee today in a meeting that could still prove critical for her staying on as leader. The arrangement with Northern Ireland’s Democratic Unionist Party is still unsigned and creates tension for Northern Ireland’s devolved government. Meanwhile, the new Cabinet shows few changes from the old and little to suggest a major re-think of the direction of Brexit – despite negotiations set to begin next week. Speculation persists over how long PM May can last, who might replace her and when the next election might be. Meanwhile the Article 50 negotiation clock keeps ticking…  
  • US news dominated by revelations from ex-Head of FBI Comey, while the House passed a bill to unwind the post-crisis Dodd-Frank legislation. The coming week will focus on the Fed, which releases its latest decision, statement, projections and press conference on Wednesday. We expect a 0.25% increase in the Fed Funds Rate to 1.00-1.25%. We also expect more details on how the Fed plans to adjust its balance sheet policy, expecting it to initiate such a policy before year-end (although we note some see this taking place as early as September). Looking ahead, the economy will be the key determinant in whether the Fed hikes again in September (our central case). Survey data continues to be supportive of faster growth recorded over the coming months, although this week’s retail sales for May look likely to be soft again, while May’s CPI inflation will  be watched for any further evidence of ‘core’ softening.
  • Robust data points to continued stability in China. Last week’s trade and inflation data suggests that the macro environment in China remained stable in May. Export growth quickened slightly to 8.7% yoy, thanks to better shipments to Europe and the US. This data corroborates the export numbers from other regional bellwethers (e.g. Korea and Taiwan), pointing to moderating, but still robust, export performance in Asia. On the other side of the ledger, Chinese imports grew by 14.8% in May, strongly exceeding market expectations. Higher commodity imports, in volume, were key drivers of the headline strength, suggesting that domestic industrial growth has held up well in May. Despite that, continued dissipating base-effect has led to a further moderation in producer prices, with PPI inflation easing to 5.5%. CPI inflation turned up slightly to 1.5%, underpinning by non-food core prices. Overall, these trade and price data are consistent with our view of a broadly stable macro backdrop, with some moderation of growth from Q1. We await this week’s release of May activity data for more complete information.

Events coming up:

The Fed releases its latest decision, statement, projections and press conference (Wednesday)

Second round of French parliamentary elections (Sunday)

Euro area data: economic sentiment Germany (Tuesday), EMU industrial production (Wednesday), consumer surveys for France, Italy and Germany (Thursday)

Rating reviews on Friday: Portugal (Fitch)

UK: CPI inflation (Tuesday), labour market data (Wednesday) and retail sales (Thursday)

Market and asset types measured by the following indices: Equities = MSCI. Fixed Income = JP Morgan and BofAML. 

 

The Research & Investment Strategy (R&IS) team at AXA Investment Managers present their views on recent developments and the factors shaping markets over the week ahead. For more information on the R&IS team or any of the above comments, please contact us or follow us on social media for updates throughout the week

 


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