This year global monetary policy was expected to tighten. The Federal Reserve raised rates again in December and continues to shrink its balance sheet. The European Central Bank (ECB) ended its quantitative easing program at the end of last year and its current guidance is that rates will remain at record lows until later this year.
In aggregate, the balance sheets of major central banks are still set to end the year smaller than they started it for the first time since the financial crisis. But fears of a marked slowdown in global growth have prompted a shift to a more cautious stance over rate hikes among some of these banks. That's also helped calm global equity markets, which are now up 14.5% from their December low in local currency terms:
- It's now close to a year since the ECB first highlighted that Europe was undergoing a "temporary slowdown," originally attributed to cold winter weather. This weekend ECB officials lined up to flag a potential change in stance. Olli Rehn noted a “weakening of the economy,” which Francois Villeroy de Galhau said could prompt a change in guidance if it becomes clear the situation isn’t temporary. Benoit Coeure said new loan operations (TLTRO) are being discussed. Our view is that the ECB will not raise rates until the spring of 2020.
- The Fed has adopted a “patient” data-dependent stance and this weekend its officials provided more color on what this could mean for rate hikes this year. Raphael Bostic, Patrick T. Harker and Mary C. Daly offered updated rate views, predicting a mix of one or zero hikes this year. We forecast one hike in 3Q.
- There are exceptions to the dovish trend. Last week Governor Oeystein Olsen of Norway's central bank said it will continue to raise interest rates if the economy follows current projections, and at its last meeting the Bank of England unexpectedly retained its tightening bias. But they are outliers at smaller central banks reflecting local idiosyncratic factors – the strength in Norway’s economy as oil prices have recovered and the BoE trying to look through the short-term noise of Brexit to focus on the UK economy’s medium-term prospects.Against the backdrop of a softer policy stance on rates, we maintain a modest overweight in global equities combined with hedge positions to help navigate market volatility. We choose to position for the more idiosyncratic situations with relative value trades. Within our foreign exchange strategy, we overweight the Norwegian krona versus the Swiss franc as we don’t expect the Swiss National Bank to tighten until after the ECB has raised rates. The uncertainty around Brexit could generate significant short-term volatility in sterling, but we see medium-term value should GBPUSD fall below 1.24 and EURGBP move above 0.92.
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