Weekly Economic Briefing

It takes more than the Fed

25 April 2017

Global Overview

  • The Fed has begun signalling its desire to start reducing the size of its balance sheet by the end of the year as long as it continues to make progress on its labour market and inflation objectives.
  • Given the evidence that asset purchase programmes (APPs) have lowered global government bond yields, particularly through their effect on term premia, the bias among economists is for Fed balance sheet normalisation to put some upward pressure on long-term interest rates.
  • However, there are reasons to be cautious. The Fed is likely to reduce its balance sheet only slowly, phasing out reinvestments initially and avoiding directly selling its Treasury and MBS securities.
  • We also expect the ECB and BoJ’s APPs, which have also weighed on yields, to continue until at least the end of 2018, though maintaining both programmes will present challenges if reflation is unsuccessful. Meanwhile, persistent real and regulatory factors are also a constraint to a large rise in interest rates.
  • China faces a different dilemma. Policy tightening has had only a limited effect on activity so far. But push too much harder and growth could crumble.
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US

The Fed has signalled its desire to begin reducing the size of its balance sheet. It is likely to proceed very cautiously during the initial phase.

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UK

The news of a snap election provided some support to the beleaguered pound. A hypothetical return of sterling to its pre-referendum levels could hasten the end of easy policy.

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Europe

The ECB’s late foray into QE has been a success. If underlying inflation improves, it can taper next year. If there are disappointments, it will have to find a solution to scarcity issues.

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Japan & Developed Asia

The BoJ’s asset purchases have dwarfed efforts by other central banks. If these are successful it will have to tread carefully with regards to withdrawal. If not, then policy choices become even harder.

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Emerging Markets

Tighter liquidity and regulatory policies are beginning to impact Chinese credit growth. Mortgage growth will likely slow but further tightening may be needed.

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Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

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