Macro Insights

Paris, 13/07/2017


  • Bond market sell-off amid ECB minutes release; all eyes on Bank of Canada and the possibility of global monetary policy tightening.


  • Bond market sell-off continues. Currently,  Bund yields are trading above 0.5%, close to our fair value estimate and year-end forecast of 0.6%. A repricing of expectations is also visible in money markets, where OIS curves now attach a 50% probability of an ECB rate hike by April 2018 vs only 25% before the Sintra ECB conference. Recent ECB minutes revealed that the Council started discussing tapering in June and confirmed that the ECB would take a cautious approach to managing monetary policy normalisation, consistent with recent comments from Praët and Coeuré. This week, a number of ECB members speak, including at the Eurogroup and Ecofin meetings, in the run up to the ECB meeting on 20 July. The tone of communications will be important to see whether the ECB is at ease or otherwise with the recent market movements.  


  • Bank of Canada may hike rates on Wednesday. BoC Governor Poloz added his contribution to hawkish commentary in Sintra recently. This convinced a majority in markets that the BoC will raise rates by 0.25%  to 0.75%, having spent two years at 0.50%. The Bank of Canada would join a small band of central banks to be tightening policy, which should alleviate some pressure on the US dollar, but may add to the hawkish caution prevailing over government bond markets in recent weeks.   


  • US activity and inflation continue to diverge. Non-farm payrolls last week confirmed that the expansion is tightening the labour market, but generating little inflationary pressure. This dichotomy is likely to be at the centre of Fed Chair Yellen’s testimonies to Congress this week (House Wednesday, Senate Thursday). We expect Yellen to repeat June’s robust defence of the Fed’s anticipated gradual withdrawal of monetary policy, in expectation of inflation meeting the Fed’s 2% inflation goal over the coming two years. A sub-text will be whether this proves to be Chair Yellen’s last such testimony. Some advocate her replacement next year for a Chair that favours a more rules-based approach. Friday’s retail sales and CPI inflation releases for June will be important in judging the activity versus inflation dynamic.   


  • UK government holds ‘re-engagement with business’ meeting. This suggested that senior Cabinet ministers were against a multi-year transition period that left the UK in the Single Market and Customs Union, after leaving the EU. It is not obvious that the government has ‘softened’ it’s Brexit negotiation stance since the election. Political uncertainty has impacted sterling since the election, but is currently subdued amidst ongoing BoE hawkishness. We argue both features create scope for sterling weakness over the coming months.


  • Positive China data flow continues to suggest encouraging momentum. June’s PMI readings broadly beat market expectations, suggesting Q2 GDP at 6.8% - a touch stronger than our pick of 6.7%. Steady inflation data also point to a good preservation of growth momentum in Q2. Looking ahead, the first batch of June activity data, along with Q2 GDP, will be released next Monday, following this Friday’s National Financial Work Conference (held every five years). The latter is a high-level meeting for the Chinese financial regulators to discuss the direction of financial reform, policy coordination and maintenance of financial stability. Even though there could be important decisions – such as forming a Financial Coordinating Committee – that matter for the long-term functioning of the financial system, but the immediate impact on the market is not yet clear. Instead, we think the market is more likely to take cues from data and offshore developments this week.


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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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