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Financial Markets Monthly Summary – April 6, 2018

Core Content Overview

This report provides an analysis of the global financial markets in early 2018, focusing on interest rate outlooks, economic performance, inflation trends, and central bank policies across major economies. It highlights the impact of trade tensions, fiscal stimulus, and monetary policy adjustments on market sentiment and economic activity.

Main Points and Key Insights

Trade Policy and Market Impact

• US-China Trade Tensions: The Trump administration's aggressive trade policies, including tariffs on $50 billion of Chinese imports, have raised concerns about a potential trade war.
• NAFTA Negotiations: There is a growing willingness to reach a deal before July 1, with the US reportedly softening some demands, particularly on auto production and dispute resolution.
• Trade Uncertainty: While initial steel and aluminum tariffs were largely rolled back, the risk of broader trade conflict remains. This has affected equity markets, leading to a second consecutive month of declines.

Interest Rate Outlook

• United States: The Fed is expected to raise rates gradually, with the next increase likely in June. The median projection for the fed funds rate over the next two years remains around 2.5%.
• Canada: The Bank of Canada is likely to hike rates in May, supported by rising wage growth and inflation. However, the BoC's tightening bias is tempered by ongoing Brexit uncertainty.
• United Kingdom: The BoE is projected to raise rates in May, six months after the last increase. The central bank is expected to maintain a gradual approach due to Brexit-related risks.
• Euro Area: The ECB is moving slowly toward monetary tightening, with no rate hikes expected until the second half of 2019.
• Australia: The RBA is expected to remain on the sidelines throughout 2018, citing slow wage growth and competition in retail as inflationary pressures.

Economic Outlook

• US Growth: The US economy started 2018 weakly, with Q1 growth at 1.4%. However, the report suggests this is likely a seasonal adjustment issue and not an underlying slowdown. A rebound to 3.1% growth is expected in Q2.
• Canada Growth: Canada's Q1 GDP fell by 0.1%, largely due to non-conventional oil and gas extraction and real estate sector declines. The forecast for Q1 growth is 1.6%, with a slower pace expected for 2018 overall.
• UK Growth: UK GDP growth is projected to be around 0.3–0.4% in 2018, slightly below its longer-run potential. However, the economy is expected to remain resilient with continued job creation.
• Euro Area Growth: The Eurozone is expected to grow at a modest pace, with the unemployment rate suggesting some slack in the economy.
• Australia Growth: Australia is expected to maintain a growth rate of 0.7–0.8% in 2018, with the unemployment rate remaining stable due to a large labor force.

Inflation Trends

• Canada: Core CPI inflation is rising, averaging 2%, with some measures approaching 2.5%. This is driven by wage growth and price pressures from Ontario's minimum wage increase.
• United States: Core PCE inflation has increased to 1.6% and is expected to rise further, supported by tight labor markets and fiscal stimulus.
• United Kingdom: Inflation is expected to remain above the BoE's target of 2%, with recent data showing a slight decline to 2.7%.
• Euro Area: Core inflation has remained near 1%, with the ECB continuing to maintain an accommodative stance.
• Australia: Inflation is expected to stay low, with the RBA citing slow wage growth and retail competition as factors.

Central Bank Actions and Policy Bias

United States (Fed)

• Rate Hike: The Fed raised rates by 25 basis points in March, with the next hike expected in June.
• Forward Guidance: The Fed's projections indicate a gradual tightening cycle, with a median forecast for the fed funds rate of around 2.5% over the next two years.
• Policy Consensus: There is a split among Fed officials on whether two or three more hikes will be appropriate in 2018.

Canada (BoC)

• Rate Hike: The BoC is expected to raise rates in May, with the next hike likely to be gradual.
• Policy Communication: The BoC's recent statements suggest a cautious approach due to ongoing uncertainty around Brexit.

United Kingdom (BoE)

• Rate Hike: The BoE is expected to raise rates in May, with a cautious pace due to uncertainty about the UK's future relationship with its trading partners.
• Forward Guidance: The BoE's latest projections suggest inflation will remain above target unless monetary policy is tightened further.

Euro Area (ECB)

• Rate Hike: The ECB is expected to continue its accommodative stance, with no rate hikes anticipated until the second half of 2019.
• Policy Shift: The ECB is gradually moving toward normalizing monetary policy, with a focus on exiting net asset purchases.

Australia (RBA)

• Rate Hike: The RBA is expected to remain on the sidelines in 2018, citing slow wage growth and competition as inflationary constraints.
• Policy Tone: The RBA's recent statement leaned slightly dovish, indicating a preference for maintaining low interest rates.

Key Highlights

• The US economy started 2018 weakly but is expected to rebound in Q2.
• Fiscal stimulus, including tax cuts and increased spending, is expected to boost growth.
• Inflation is rising in the US and Canada, supporting rate hikes.
• Trade tensions and geopolitical uncertainty continue to affect market sentiment.
• The BoC is likely to hike rates in May, while the ECB and RBA are expected to remain cautious.

Conclusion

The report underscores a global environment of cautious monetary tightening, driven by rising inflation and wage growth, but tempered by trade tensions and geopolitical uncertainty. Central banks are expected to act gradually, with the US and Canada leading the way in rate hikes, while the ECB and RBA maintain a more accommodative stance. The outlook for 2018 is mixed, with growth expected to remain stable but inflationary pressures building.