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Document Summary: Financial Markets Monthly - February 9, 2018

Core Content Overview

This document provides an analysis of the global financial markets and central bank policies in early 2018, with a focus on interest rates, economic growth, inflation expectations, and currency outlooks.

Main Points and Key Information

Interest Rate Outlook

• US Fed Funds Rate: Expected to rise gradually, with a forecast of three rate hikes in 2018 and four in 2019. The Fed is anticipated to raise rates in March despite recent equity market volatility.
• Canada Overnight Rate: Projected to increase to 2.25% by the end of 2018, with a once-a-quarter tightening pace. The BoC raised rates in January and is expected to continue this trend.
• UK Bank Rate: The BoE signaled a more hawkish stance, forecasting a rate hike in May and two more in 2019. This is due to concerns over inflation and economic growth outpacing potential.
• Euro Area Deposit Rate: Expected to remain at -0.40% through 2018, with potential easing in 2019. QE is likely to continue until at least mid-2018.
• Australia Cash Rate: Likely to remain unchanged in 2018, with a gradual increase expected by 2019. The RBA maintains a cautious stance.
• New Zealand Cash Rate: Expected to stay at 1.75% for 2018, with a potential increase in 2019. The RBNZ is not expected to raise rates soon due to low inflation expectations.

Economic Outlook

• US GDP Growth: Strong momentum continued in 2017, with Q4 growth at 2.6%. Forecast for 2018 is 2.6%, slightly above the 2017 level, driven by tax cuts.
• Canada GDP Growth: Rebounded in November 2017 to 1.9% in Q4, with a forecast of 1.9% for 2018. Growth is expected to remain slightly above potential.
• UK GDP Growth: Expected to remain stable, with a forecast of 1.5% for 2018. The BoE is concerned about growth nearing capacity.
• Euro Area GDP Growth: Continued above-potential growth in Q4/17, with a forecast of 0.6% for 2018. The ECB is expected to maintain accommodative policy.
• Australia GDP Growth: Expected to grow at 2.8% in 2018, slightly above the 2017 level. The RBA is cautious about raising rates due to slow inflation progress.
• New Zealand GDP Growth: Projected to grow at 3.4% in 2017 and 2.9% in 2018, with growth expected to remain stable.

Inflation Outlook

• US Core PCE: Inflation remains near the Fed's target, with a 1.9% three-month trend in December 2017. Wage growth is expected to feed into inflation over time.
• Canada CPI ex Food & Energy: At 1.9% in December 2017, slightly below the target range. Inflation is expected to rise slowly, with a forecast of 2.2% for 2018.
• UK All-items CPI: Rose to 3.4% in December 2017, indicating inflationary pressures. The BoE is concerned about inflation staying above target.
• Euro Area CPI: At 2.0% in January 2018, a welcome sign for the ECB. Inflation is expected to remain below the target range.
• Australia Trimmed Mean CPI: Stood at 0.4% in Q4 2017, with slow progress toward the target. The RBA is not expected to raise rates soon.
• New Zealand All-items CPI: At 1.6% in Q4 2017, with a forecast of 2.0% for 2018. The RBNZ is not expected to hike rates anytime soon.

Market Volatility and Central Bank Response

• Equity markets experienced significant volatility in early 2018, with the VIX rising to its second-highest level since the European debt crisis.
• The US equity market correction was driven by rising bond yields and inflation concerns.
• The Fed is expected to continue tightening despite market volatility, as the economy shows strong growth and inflation risks.
• The BoC is maintaining a tightening bias, with rate hikes expected in 2018 and a possible pause in 2019.
• The ECB is likely to hold off on rate hikes until the second half of 2019, even as the economy shows signs of strengthening.
• The BoE has shifted to a more hawkish stance, signaling an earlier and more aggressive rate hike path.

Key Highlights

• The US economy entered 2018 with strong momentum, supported by tax cuts and solid growth.
• Consumer savings dipped to a 10-year low, but spending is expected to continue growing at a near-3% pace.
• US wage growth accelerated in January, signaling potential inflationary pressures.
• The Fed is expected to raise rates in March, with a once-a-quarter pace for the year.
• The BoC raised rates in January, with further hikes anticipated in the first half of 2018.
• The BoE signaled a shift toward tightening, with a rate hike expected in May.
• The ECB is expected to maintain QE until mid-2018 and delay rate hikes until 2019.
• The RBA and RBNZ are not expected to raise rates in 2018 due to slow inflation progress.
• The RBA's growth forecasts are more optimistic, but inflation remains below target.
• The RBNZ expects CPI to remain below 2% until 2020, reinforcing their accommodative stance.

Conclusion

The document outlines a generally tightening monetary policy environment in 2018, with the US, Canada, and UK central banks expected to raise rates, while the Eurozone and Australia/New Zealand remain on hold. Economic growth is robust in the US and Canada, with inflation pressures gradually increasing. However, the BoE, RBA, and RBNZ are cautious due to concerns over inflation, trade uncertainty, and slow wage growth. The market volatility in early 2018 is viewed as a temporary correction, not a shift in the long-term economic trajectory.