The CIO office’s view of the week ahead.Trade disputes between the US and almost everybody else are reaching a climax, with US tariffs on imports prompting inevitable retaliation. Things could get worse before they get better, if President Trump puts his words into action. At this stage, global growth indicators are still flashing green and we have some hope that tough negotiations will yield to trade deals, but trade is a risk to upbeat scenarios for global economy and markets alike.It is not the only one. Amid the angst caused by American trade policy the Fed continued to sound bullish about the US economy, to the extent that Fed members now believe a total of four quarter-point hikes are on the cards this year and a further three in 2019. Together with trade politics and elections, the
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Cesar Perez Ruiz considers the following as important: CIO view, Macroview, Pictet view, Trade tensions, Yield curve flattening
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The CIO office’s view of the week ahead.
Trade disputes between the US and almost everybody else are reaching a climax, with US tariffs on imports prompting inevitable retaliation. Things could get worse before they get better, if President Trump puts his words into action. At this stage, global growth indicators are still flashing green and we have some hope that tough negotiations will yield to trade deals, but trade is a risk to upbeat scenarios for global economy and markets alike.
It is not the only one. Amid the angst caused by American trade policy the Fed continued to sound bullish about the US economy, to the extent that Fed members now believe a total of four quarter-point hikes are on the cards this year and a further three in 2019. Together with trade politics and elections, the resultant rise in the US dollar continued to put EM assets under pressure—which could continue this week if an OPEC/Russia meeting sees oil producers yield to pressure to increase output. Caution is still required on this front.
We will also be watching yield curve movements. Fed signals on rate tightening led to further yield-curve flattening last week, with the difference between the two-year and 10-year Treasury yield down to 37 bps last Friday, compared with 125 bps at the start of 2017. A benign interpretation could be that the market is gaining confidence the Fed will rein in inflation and growth just enough to make long-term rates relatively more attractive. A less benign interpretation is that the market increasingly fears the Fed is heading towards a policy mistake. The last nine US recessions were all preceded by inversions of the yield curve, which is the direction in which we are heading. We would start to become concerned were the yield curve to move below 25 bps. It is also unusual for the dollar to do as well as it has been when the curve flattens. A Fed that has been raising rates because of solid domestic data lies behind the dollar’s strength—but for how long can the Fed stay oblivious to an increasingly fragile global picture?