Three Supporting Factors and One Major Concern for 2017

Qinwei Wang is an Economist.

China’s economy has held up relatively well so far, after strong concerns one year ago. We expect some slowdown in 2017, but this should be less painful than in 2015. Let’s see the three supporting factors for China in 2017 and the major risk to watch.

A more benign commodity outlook: There has been a more visible recovery in nominal growth, with Producer Price Index (PPI) inflation back to positive territory after declining continually for nearly five years. This has been supported by rising global commodity prices in the wake of China’s reduction in overcapacity. Consumer Price Index (CPI) inflation has remained in a relatively comfortable range. Continue reading

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A 2017 USD Bull Market? More Factors to Consider.

513135937Part two in a series. Paresh Upadhyaya is Senior Vice President, Director of Currencies, US. 

In my last post, USD Bull Market: Key Drivers in 2017, I discussed the first of three drivers of the US dollar (USD) bull market: fiscal stimulus. Here I’ll examine the second two: rate normalization and idiosyncratic factors.

US Rate Normalization Gathers Steam

The monetary policy divergence theme is the other big and reliable driver behind the USD rally. We expect two key themes could lead the Federal Reserve to tighten at a quicker pace, compared with the last 12 months. Our analysis shows the Federal Reserve is behind the curve in tightening monetary policy. In the post-Volker Rule era, the Federal Reserve has increased interest rates an average of 270 basis points during its tightening cycle while Personal Consumption Expenditures Core Index has risen 0.2% and the unemployment rate has fallen 2.4%. In this tightening cycle so far, the Federal Reserve has increased interest rates 50 basis points but the inflation rate is up 0.8% and the unemployment rate has plunged 5.3%. Continue reading

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USD Bull Market: Key Drivers in 2017


Part one in a series. Paresh Upadhyaya is Senior Vice President, Director of Currencies, US.

The US dollar (USD) bull market entered its fourth consecutive year in 2016 and we believe factors are aligning for the rally to enter its fifth consecutive year, a potentially significant one. There are three factors that will fuel the USD rally in 2017: fiscal stimulus proposal, US rate normalization and idiosyncratic factors.  The degree to which these factors materialize will determine the intensity of the USD strength.

Fiscal Stimulus Policy and the USD

We expect much easier fiscal policy to be one of the two biggest drivers rejuvenating the USD rally in 2017. However, it is also the factor with the greatest upside risk. There is a strong relationship between a looser fiscal policy and the USD. Some prior USD bull rallies have been associated with easier fiscal policies, such as 1981 to 1986 and 1997 to 2002. The recent rally has drawn parallels to the 1980 to 1984 record USD bull market in which the US implemented a very tight monetary policy and easy fiscal policy. Continue reading

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EM: Trump, Jump, Pump or Dump?

Alessia Berardi is a Senior Economist in charge of providing analysis on macroeconomic issues.

Macroeconomic conditions in Emerging Markets (EMs) are much better today than they were at the end of 2015 or the beginning of 2016. In line with our 2016 Outlook, macroeconomic conditions kept improving, supported by a benign external environment led by increasing commodity prices and a very accommodative Federal Reserve. For 2017, we expect EMs to exhibit a very mild improvement from current macroeconomic conditions. The outlook is stable and positive overall with the usual significant divergences among countries.

In terms of GDP growth, a slight improvement at the aggregate level is mainly driven by higher growth expectations in Brazil and Russia after the deep recessions they have experienced. Other countries are not expected to improve their GDP growth by much, while Mexico and Turkey are expected to see significant deterioration. Continue reading

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3 Things the European Investment Grade Fixed Income Team Talked About Last Week

Big wave over old lighthouse

1. Brexit – Theresa May seeks BAFTA for La La Land performance 

In last week’s blog, we highlighted an important speech to be given by UK Prime Minister Theresa May on her vision for how the UK would manage Brexit and life after membership of the European Union. On the positive side, her speech (delivered on Tuesday January 17th in London) appeared to be quite clear about certain things that had been sources of concern up to now. The UK will be leaving the single market, Parliament will be given the final say on any potential deal negotiated, and there was an acceptance that a transitional agreement might be necessary at the end of the two-year negotiating period. This week, the UK Supreme Court is widely anticipated to rule in favour of the Parliament voting on whatever deal is negotiated with Brussels, but PM May gave no clues as to what would happen if the Parliament were to vote against her deal. On the negative side, however, there were still some signs that PM May and her team have unrealistic expectations for what they could achieve in their negotiations with Europe. For instance, her speech noted that “the days of Britain making vast contributions to the European Union every year will end”. But we also know that the EU have been very explicit in stating that the UK would still be on the hook for projects already started or running, and that there could be a significant financial cost to leaving the EU. This is likely to be a key battle between both sides in the negotiations. Another line stated that May “does not want to be part of the common commercial policy…but I do want us to have a customs agreement with the EU”. Unfortunately, in Europe, this is seen as having your cake and eating it – a kind of “a la carte” selection of the things that the UK likes, but simultaneously rejecting the things they do not like. The most stark and forthright part of May’s speech was as follows: “What I am proposing cannot mean membership of the single market…we do not seek membership of the single market. Instead we seek the greatest possible access to it through a new, comprehensive, Bold and Ambitious Free Trade Agreement” (hence the acronym BAFTA). This is Ground Zero Hard Brexit. Finally, there was the comment that noted “I want us to have reached an agreement about our future partnership by the time the two-year Article 50 process has concluded”. So still believing that a full and complete BAFTA could be completed in two years – there are plenty of people who believe this timeline is simply too ambitious. Although Sterling rallied after the speech, we still believe that UK assets could struggle once the talks actually begin. We continue to believe that an underweight stance in UK government bonds is warranted.

Continue reading

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