Research

Menu

Back

Choose Language

February 19, 2018

News

Central banks in the spotlight

The recent sell-off in equities demonstrated that investors are becoming ever more edgy about the prospect of rising interest rates and inflation. According to Bank of America’s Global Fund Manager survey, two of the most prominent fears simmering in markets are; a crash in bonds caused by inflation, and a “policy mistake” by the Federal Reserve (Fed) or the European Central Bank (ECB). From here on out, markets will be increasingly sensitive to any data that indicates inflation is picking up – as we saw on February 2nd when rising wage figures in the US catalyzed a global retreat from equities. Investors will also be going through central bank communications with a fine tooth comb for indications that they are becoming more hawkishly inclined… In the week ahead, communications are anticipated from both the Fed and the ECB.

The Fed

The Fed is close to achieving its dual mandate of maximising employment and stabilizing prices (with an inflation rate steady around 2%). In January, core price inflation came in at 2.1% (annualized) whilst unemployment is at a 17-year low of 4.1%. The ever-beating drum of positive data is emboldening hawks within the Fed; mainly gradualists who believe monetary policy needs to be normalized in tandem with a normalisation in economic data. If the minutes of the January policy meeting, scheduled to be released on Wednesday, reveal more hawkish undertones, volatility could surge.

The Fed walks a tightrope between acting too aggressively, in a way that curbs growth and potentially ignites a bear market, and on the other hand, there is a risk that it falls behind the curve, allowing inflation and the economy to overheat.

On its path to monetary policy normalisation, the Fed has raised its target for the federal funds rate five times since December 2015 and markets see two rate hikes this year as a ‘done deal’ with a 50/50 chance of a third.

In the past, when the Fed hiked short-term rates to the point that yields on 2-year Treasuries exceeded those on 10-year notes, the yield curve ‘inverted’ and a recession almost always ensued. The Fed must be extremely delicate, not only in its actions, but in how it communicates the path for hikes.

Even if the Fed doesn’t accelerate its hiking path and observes its current forward guidance, there is a danger that the new Fed Chairman, Jerome Powell, spooks the markets as he traverses a  ‘communication learning curve’. More significant than the release of the Fed minutes next week, will be Powell’s first press conference following the FOMC meeting scheduled for 20-21st March.

The ECB

The strong euro is posing as an obstacle in the ECB’s plans to wean the Eurozone of off ultra-accommodative monetary policies. On Wednesday, the ECB will have a non-monetary policy meeting and investors will be attuned to any discussions concerning the euro. Euro strength is thought to be hampering the ECB’s ability to get inflation up to  its target of ‘close to but less than 2%’. A firmer currency tends to dampen inflation by making exports more expensive and imports cheaper. The mere 1.3% inflation rate seen in January stems mainly from a light pick-up in consumer spending and energy costs. Normally, in the past, Mario Draghi, the ECB President has been able to talk down the euro, but it remains questionable as to whether he will still be able to do so amidst rising expectations for tighter monetary policies.

2018 is expected to be a year of higher volatility and acute sensitivity to inflation signals and central bank communications around interest rates. However, over the coming weeks, investors should bear in mind that markets are still bolstered by strong fundamentals. Data points to stronger revenues, margins and multiples to come and there is an opportunity in equity markets to benefit from the end of the cycle. Further, the recent display of fragility in the global sell-off, has served as a strong reminder to central banks that they are really walking on eggshells.

Disclaimer

All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data and/or economic information”), are provided for information purposes only, without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data. All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete. This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives, financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers, employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data, the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance. Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic documentation can be altered subsequent to original distribution.

As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments. It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.

Read more


More

October 15, 2024

BILBoard

BILBoard November 2024 – Beyond the U...

  The race for the US Presidential election on November 5 is heating up, but business activity is essentially frozen given the uncertain outcome and...

October 11, 2024

Weekly Insights

Weekly Investment Insights

  Hurricanes caused widespread damage last week. In the US, Florida residents rushed to evacuate ahead of Hurricane Milton, which followed closely on the heels...

October 4, 2024

Weekly Insights

Weekly Investment Insights

  Comments from central bankers toyed with both currencies and rate markets over the past week. The Fed Chair Powell said that the US central...

September 30, 2024

Weekly Insights

Weekly Investment Insights

Autumn is in full swing and with the change of season came a turnabout announcement that was noticed in all corners of the market. Beijing’s...

September 30, 2024

BILBoard

BILBoard October 2024 – Harvest season

Executive Summary As autumn approached, we saw increased volatility on capital markets. Bad days were swiftly followed by significant rallies, and like the leaves currently...

All articles