Guide to the Markets
In Europe, the political risks that have characterised the first half of 2017 have passed in a market-friendly fashion, with centrist candidates now holding power in both the Netherlands and France, and the Italian election looking like a concern for 2018. With the major political hurdles clearing and the ECB sounding positive—but cautious—we expect headline risk to dissipate in the second half of 2017.
Guide to the Markets presents a wide range of macroeconomic data that can help liquidity investors assess the economic backdrop and position their portfolios. Among the issues discussed:
- Economic data seen in 2017 so far suggests an entrenched recovery currently tracking GDP growth of 0.6% per quarter. Recent eurozone PMIs printing in the mid-to-high 50s indicate that GDP growth can accelerate further. The employment story continues to improve and the consumer remains strong. The only missing link for the ECB with respect to normalising policy relates to inflation, or lack thereof. (p.4, 5, 6, 15, 17)
- On the policy front, the ECB’s Governing Council took its first baby step towards normalising at its June meeting. With downside risks to inflation less of a concern and economic growth improving, the ECB removed the risk of lower rates from its forward guidance. The central bank has pinned sustained upward pressure on inflation as a minimum requirement before it starts tightening policy: wage inflation is critical in this regard and labour market trends will be keenly followed in the third quarter. (p.4, 6)
- Short-dated yields remain at historic lows. The ECB’s growing balance sheet and excess liquidity is keeping money market yields locked at negative levels. Unfortunately, we see no near-term reversal for this dynamic. (p.8, 18)
- With tapering of quantitative easing not expected to start until early 2018, money market rates could potentially grind lower over the quarter. (p.10, 61)
As you consider these important topics, we will be happy to share our market views and tailor liquidity solutions to best meet your needs.