Risk abated for now, expect more headwinds ahead

THE global economic recovery remains broadly intact, with variations between regions and timing.

This is reflected in core central banks’ growing confidence to normalise their policies.

The recently concluded French election should remove Europe’s largest political uncertainty, while the healthcare vote in the US might help boost confidence in the likelihood of tax reforms later in the year.

However, great political uncertainties remain, contrasting with record low market volatility.

The narrative of a synchronsed global recovery still applies, in our view.

While we acknowledge that US growth in the first quarter (1Q) has been weak, China’s recent April manufacturing PMIs suggest reduced momentum, and that the recent softness in commodity prices raises questions about global demand, e believe, the reasons for the softness in US growth, mainly due to consumption, are mostly transitory, and that growth is likely to pick up in 2Q.

Indeed, the solid labour market data suggest that private consumption, the engine of US growth, should remain healthy.

In China, there signals of a slowdown as there is stronger than expected growth in 1Q and this suggest moderation rather than any serious disruption.

Similarly, we see the recent oil price declines as temporary, chiefly driven by inventory adjustments and supply factors, rather than reflecting weak demand.

This view of a sufficiently healthy global economy is reflected also in the confidence of monetary policy makers.

As widely expected, the Fed did not act on interest rates or its balance sheet but it did send a strong message.

In spite of some soft US data recently, the FOMC statement lacked any tone of uncertainty over the state of the economy or hesitation over the path of policy, indicating that it would maintain its normalisation path.

This confidence stands in contrast to the cautious overtones that plagued FOMC statements in the first two years of this hiking cycle, when it ended up raising rates only twice.

We thus maintain our call for rate hikes in June and September, and the beginning of balance sheet normalisation in December.

The ECB remains far behind the Fed in its policy cycle, but it continues to gain confidence as well.

Against the backdrop of improving activity, robust sentiment and decline in political risk, ECB’s commemts since its April meeting has further acknowledged the positive changes in the balance of risks.

We expect changes in the ECB’s forward guidance in June, gradually preparing markets for further tapering in 2018, followed by small hikes in the deposit rate before a quantitative has fully ended.

Indeed, in public comments this week, ECB executive Board member Peter Praet did suggest that the ECB’s current stance of rate hikes coming only “well past” the end of its assetpurchase programme could be reconsidered.

Overall, we reckoned the risk in Europe has subsided after a reaffirmation of appointment of Macron.

However, uncertainties still linger around other European states and these are closely watched.

Market volatility should return in the midterm given the looming uncertainty.