The four-year synchronisation among developed-world central banks might be about to weaken as domestic drivers take over from global trends in determining price outlooks. New Zealand may break the policy uniformity by raising interest rates. In the US, traders are embracing the Federal Reserve's push-back against market bets on near-term easing. In the euro area, price pressures are retreating faster than expected, supporting arguments for earlier cuts. Traders expect the Swiss National Bank to cut interest rates, while the Bank of England faces challenges with a downturn in the economy and high inflation. The International Monetary Fund's latest forecasts show improved prospects for the US, worse prospects for the euro zone, and poor figures for the UK. JPMorgan strategists advise clients to prefer US equities, credit, the dollar, and bunds. The Bank of Canada and Reserve Bank of Australia are expected to remain more hawkish than global peers. RBA governor Michele Bullock says a further increase in interest rates cannot be ruled out. Japan may diverge by raising interest rates. Bond traders expect benchmark rates to be lower in the US and Europe but higher in Australia and Japan. European Central Bank officials are concerned about a quick U-turn that could be seen as underestimating inflation. Central banks should avoid premature easing that would undo credibility gains and lead to a rebound in inflation, but also not delay cuts too much, jeopardising growth and risking inflation falling below target. The shift in inflation drivers makes analysis of existing trends complicated. Local pressures are more idiosyncratic, requiring central banks to react in their own ways. Varying neutral policies would be a return to the norm outside of crisis periods. However, broad trends in technology, energy, and commodities will likely keep some degree of consistency in policy direction. Central banks must contend with different structural issues, making it inevitable that the uniformity seen since mid-2020 will ebb. [b677644b]
Franklin Templeton Fixed Income economists are seeing increasing divergence in the monetary policy paths across the Group of Three (G3) nations. The US Federal Reserve is vigilant about sustained disinflation in the United States, while the European Central Bank has embarked on a controlled monetary policy easing cycle. The Bank of Japan is weighing the economic benefits of a weak yen against its impact on inflation expectations. In the US, downside risks to growth are rising, but inflation remains a top concern. Cracks are forming in the labor market, and signs of consumer weakness are emerging. However, consumer balance sheets remain strong. In Europe, the euro-area economy is slowly recovering, with positive growth momentum expected to continue. The labor market remains tight, and inflation is moderating. The European Central Bank is pursuing cautious monetary easing. In Japan, growth remains on track, and inflation is set to revive. The Bank of Japan is facing a dilemma regarding whether to hike rates. Stickier inflation is expected, and a higher terminal rate is predicted. Overall, the outlook for fixed income investments is influenced by the diverging monetary policies and economic conditions in the G3 nations. [a0774507]
In May, US rates rallied while Euro rates rebounded. The eurozone economy is surprising to the upside relative to the US. US prints indicated a moderation in the US economy, with downside surprises on housing and PMIs. In the eurozone, good PMI data confirmed improving economic activity. Corporate credit performed well, reflecting positive equity market performance. Spreads in EUR IG credit were mostly flat, but EUR HY continued to tighten substantially. Emerging market debt performed well despite challenging election results in Mexico, South Africa, and India. The new Fed "dots" came in hawkish, but Jerome Powell suggested that most members had not updated their views based on the latest data. The ECB proceeded with its first rate cut in five years. The European elections brought few surprises. In the UK, inflation hit 2% but an interest rate cut is unlikely. The property market is showing signs of recovery. UK interest rates were held at 5.25%. Scottish Widows found that more than one in four UK adults don't know how much income they will need in retirement. HMRC's 2024 edition of 'Measuring tax gaps' shows a discrepancy between the amount of tax that should be paid and the amount actually paid. Organisations are under pressure to protect data and implement cybersecurity measures. [dd7ca88d]
Investment markets mostly rose over the last week, with US shares buoyed by increasing confidence in Fed rate cuts this year and strength in tech stocks. Australian shares rose around 0.6% driven by resources and property shares but other sectors fell. Bond yields were mixed – down in the US and much of Europe, but up in Germany, Japan and Australia. Oil, metal and iron ore prices rose as did the $A and the $US fell. With increasing talk Biden will be replaced as the Democrat candidate and Trump’s lead continuing to widen to now around 3% in general polls and the PredictIt betting market putting the Republican’s probability of winning at 59% versus the Democrat’s (whether Biden or a replacement) at 45% the focus will increasingly turn to Trump’s policies. Tax cuts and deregulation will be cheered by share markets – but his policies for much higher tariffs on imports, lower immigration and a less independent Fed suggest higher inflation with more tax cuts likely to add to the already big US budget deficit (which is around 7% of GDP) all of which is bad for bonds and could put pressure on share market valuations. Of course there is a way to go yet. Bond vigilantes and the French election. The first round French parliamentary election that saw the far-right National Rally “win” but with a slightly lower percentage of the vote than indicated in polls (33% v 36%) and the withdrawal of left and centre candidates going into the final round as part of a “cordon sanitaire” to reduce 3 way races that would split the vote and favour NR has seen some easing in fears of another Eurozone crisis including some easing in the spread between French and German bond yields. Going into this Sunday’s second round election, NR are likely to get more seats than any other alliance but probably not enough to form government. A hung parliament would not be good in terms of reducing the deficit and implementing reform – but could be seen as a least bad outcome for markets as it would reduce the chance of a conflict over fiscal policy and head off extremist NR policies. By contrast if NR is able to form government it would add to fears of conflict with the European Commission over fiscal policy which could if NR digs its heals in set off another crisis. That said its worth bearing in mind that the NR is unlikely to go down the path of trying to leave the Euro as it is popular in France. Secondly, just as surging bond yields – the “bond vigilantes” – headed off economically irresponsible fiscal policies in parts of Europe through the Eurozone crisis last decade, notably in Greece (under far left Syriza in 2015), and also in the UK (under Truss) and in Italy in 2022 (under PM Meloni and the Brothers of Italy), the same would likely happen again if NR is able to form government and tries to do the same. Note bond investors are not being mean or vindictive but just trying to protect their investments – in other words the message to errant governments is “you can do whatever you want, but if it’s going to unsustainably blow out the budget deficit we won’t lend to you!” Finally, the ECB has tools that can be deployed to calm individual bond markets if necessary (providing the country meets certain criteria). That said it could be a bit rough for markets in the interim if NR is able to form a government. So, all eyes will be on the outcome from Sunday’s election. [400444dd]