Market Update; Deposit Focus.
Posted: 20th February 2018 | Share
The Eurozone has seen a strong pick-up in Gross Domestic Product (GDP) thanks to improving global growth, which currently stands at 2.7% for the area. Figures released in February showed that growth has been across peripheral countries as well as the core larger economies that have historically led growth. The strength of the recovery may prompt the European Central Bank (ECB) to revisit their stance on stimulus: they are scheduled to buy bonds from member states until September but these figures may support a slowing of quantitative easing (QE) with many economists believing they will stop QE purchases after September.
Following the most recent Bank of England press conference at the beginning of February Governor Mark Carney left markets feeling that an interest rate rise for the UK could come as early as May. We suddenly seem to be considering, not if interest rates will rise, but when. Current implied probabilities reported on Bloomberg show a likelihood of 65% increase from the current base rate of 0.50%. Such propensity was supported by UK Consumer Price Inflation staying at 3%, well above the 2% target. Inflation at these levels could be as a result of a number of factors including higher fuel prices, and a weak pound inflating imports and input costs or, more optimistically, low unemployment with inflation driving wages higher within a growing economy. The markets and Bank of England alike will need to await UK first quarter GDP in April before we get clarity on what may be causing inflation to be this high.
When the Federal Open Market Committee (FOMC) met at the end of January there were few surprises and interest rates remained unchanged. There seems to be an impetus for the Fed to await further clarity on inflation and economic performance before they embark on additional rate rises. Increasing inflation saw US government yields rise to levels last seen in 2014; US 10-year Treasuries hit a high of 2.8930% in February. While Janet Yellen has now chaired her last meeting the incoming Fed Chair, Jerome Powell is widely expected to follow her lead and adopt a slow and steady approach to interest rate rises. Expectation remains for the next move higher – to come in March should unemployment remain low and the US economy continues to prosper.
The Bank of Japan seems unlikely to change their monetary policy any time soon with recent GDP figures disappointing markets and their continued commitment to boost inflation remaining key, Japan is still far from the 2% inflation goal. The central bank has an open-ended bond buying program in place. However, there had been rumours earlier in the year that they may be slowly tapering their program, although such fears seem to have subsided.
Bank Leumi (UK) plc has been proactive to pass on changes to our clients with immediate effect as we continue to strive for the best possible outcome our clients.
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