How We View Current Global Market Conditions - May 2017
The international environment remains supportive thanks to an upbeat growth outlook (driven primarily by cyclical upswings in China and the US), ongoing monetary policy accommodation in Europe and as the US Federal Reserve (Fed) continues on its path towards interest rate normalisation.
At the end of the first quarter of 2017, developed economies maintained their recent strong momentum. Europe continues to be the best-performing region, with economic data supporting upward revisions to its 2017 growth outlook, broadly at 2.5%. Given the positive growth dynamics, tightening labour markets and strong gains in headline inflation, the European Central Bank will be watching closely for signs of pressure on core inflation.
Activity data in the US were a little less robust. However, consumer confidence jumped to the highest level since the end of 2000 and manufacturing remains strong. As anticipated, the Fed raised its key interest rate by 25 basis points (bps) to 50bps during the first quarter of the year, with the market pricing in a 50% change of another 0.25% hike in June.
There seems to be a sense in markets that we are entering a new reflationary phase and that central banks will be able to unwind the exceptionally accommodative polices that have been in place for many years. This holds the key to how markets will ultimately perform.