Mark Dowding, Co-head of Investment Grade at BlueBay Asset Management, has produced his latest weekly market outlook, with this edition outlining the current economic environment in the US and the Eurozone, in the context of the potential interest rate hikes over the coming year.
Key points are as follows:
US: With the global economy firing on all cylinders, we believe that momentum may be self-reinforcing over the next several months unless bond yields rise, so for the time being, we continue to operate against a backdrop where a long position in risk assets and a short position in interest rate duration continues to be warranted, in our view.
The Federal Reserve: Markets currently discount approximately 2.4 Federal Reserve hikes this year, which remains too little in our opinion and it has been interesting to note of late, that forward inflation breakeven rates have started to rise from very subdued levels.
Emerging Markets: Emerging markets also look set to continue to benefit from the growth backdrop, even though we would warn that trade appears the #1 issue on the Trump agenda right now, and we would largely expect a tweet to announce that the US will serve 6 months’ notice with respect to withdrawal from NAFTA anytime soon.
CPI: We expect inflation to trend up during 2018, but see more of this move from Q2 onwards and consequently a more benign outcome today may be expected. However, we would note that in our view, there remains a lot of complacency with respect to inflation and therefore a surprise to the upside could have a substantial market impact – pushing yields and the US dollar stronger and potentially hurting risk assets.