Perspectives Pictet

Short-term rebound in the UK, driven by services.The Office for National Statistics (ONS) published this week a new rolling monthly estimate of UK GDP. The release pointed to a rebound of growth in Q2 (quarterly data will be published on August 8). According to the ONS, the rolling three-month growth to end-May was 0.2%, compared to 0% in the three months to end-April (see chart below).Looking at the details, the services sector (79% of the economy) grew by 0.3% in the three months to...

While trade tariffs could impact prices at some point, inflation looks unlikely to spiral out of control.Leaving aside energy prices (up 24% y-o-y), core CPI inflation in the US remained moderate in June rising 0.16% m-o-m, which pushed the y-o-y reading slightly up, to 2.3% from 2.2% in May. A print of 2.3% y-o-y, while above the one-year average of 1.9%, is a relatively tame reading in light of the very low US unemployment rate of 4.0%. By contrast, core CPI inflation peaked at 2.9% y-o-y...

The new US tariffs threatening Chinese imports and probable retaliation could bite into US and Chinese growth. As US midterm elections approach, the situation could worsen before it gets better.The Trump administration has stepped up its trade actions further by increasing the net of Chinese imports that will be subject to US tariffs: on top of the USD50 billion of Chinese imports subject to a 25% tariff already announced, the US Trade Representative has prepared a list of a further USD200...

Trade disputes should continue to weigh on emerging market currencies in the short term.Despite a relatively stable US dollar index and 10-year US Treasury yield since the end of May, emerging market (EM) currencies have remained under pressure, especially as a result of the recent escalation in trade tensions and a significant decline in the renminbi. The two latter factors have particularly weighed on Asian EM currencies.Since mid-June, the Chinese renminbi has weakened significantly...

We are now very close to the neutral rate of interest in the US, meaning Fed policy is ceasing to be expansionary.After seven quarter-point rate hikes in the US since the end of 2015, we reckon we are close to a neutral rate of interest – the rate of interest consistent with trend growth, stable prices and full employment. We calculate that the current neutral rate is 2.1%, compared with a Fed funds rate of 2.0%.A neutral rate of 2.1% is considerably lower than the 4.4% rate that prevailed...

The CIO office’s view of the week ahead.Last week saw some welcome stabilisation in markets, even though the first wave of US tariffs against Chinese products kicked in on Friday, followed immediately by Chinese counter-measures for an equivalent amount. Instead, investors remained focused on the dollar. The recent strength of the greenback has contributed much to emerging markets’ (EM) weakness. But the dollar index weakened at the end of last week following the release of average US...

More of the same in the US labour market: strong jobs and moderate wage growth.The June employment report showed ‘more of the same’, with payroll growth still strong and wage growth still moderate—in other words, it’s still ‘Goldilocks’. Crucially, the payroll report shows that trade tensions are still having a minimal impact, and supporting our view that the US economy will continue to chug along at a robust pace in the near term. Based on recent data, we still expect Q2 GDP growth of...

Spare capacity is tight, so oil prices could spike higher.The June OPEC agreement to increase oil output provided only a brief respite to oil consumers. After a temporary dip, prices started to rise steadily again, with Brent gaining USD4 per barrel and WTI more than USD7 between 22 June and 6 July. The larger rise in the West Texas Intermediate (WTI) price was due to a Canadian oil-sands outage that drained stockpiles in North America.Taking into account falling oil output in Venezuela, the...

Overall, June saw a halt to recent declines in euro area business sentiment survey.The final reading for the euro area composite Purchasing Managers’ Index (PMI) rose from 54.1 in May to 54.9 in June, slightly higher than the initial estimate of 54.8. However, the manufacturing PMI fell further, to an 18-month low of 54.9, due to weakness in France and Germany. Growth remains decent in the sector but, as Markit noted, the decline in business optimism “reflects rising trade worries, political...

There are plenty of arguments for and against a Japanese equity market whose fortunes are tightly linked to the strength of the yen and the success of Abenomics.Since mid-December 2012, when Shinzo Abe came to power, to end-June 2018, the TOPIX increased by 12% in local currency terms on an annualised total return basis, a significant achievement that owes much to ‘Abenomics’. At the same time, the Bank of Japan (BoJ) has had a direct impact on equities through its commitment to buy 6...