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Financial Markets Monthly Summary - July 12, 2018

Core Content Overview

This document provides an analysis of global financial markets, focusing on interest rate outlooks, economic conditions, and central bank policies in the second quarter of 2018 and into 2019. It highlights the impact of trade tensions on market dynamics and the responses of major central banks to economic growth and inflation pressures.

Key Market Trends

• Trade Tensions: Trade disputes, particularly between the US and its major trading partners, have intensified. The US imposed tariffs on Chinese imports, and retaliatory measures followed. Auto import tariffs were also threatened, which could escalate trade conflicts further.
• Economic Growth: Despite trade risks, economic growth in several countries has remained robust. The US GDP growth reached an annualized 4.1% in Q2, one of the strongest in a decade, while Canada and the UK also showed signs of recovery.
• Inflation Dynamics: Inflation remains subdued in most regions, but there are signs of upward pressure due to stronger domestic demand and labor market conditions. The US core PCE inflation rose slightly, and inflation expectations in Canada increased.

Central Bank Actions and Outlooks

• Federal Reserve (US): Raised interest rates in June, moving away from previous guidance that rates would stay below neutral. The Fed is expected to continue tightening, with rate hikes likely throughout 2018 and 2019.
• Bank of Canada (Canada): Increased the overnight rate by 25 basis points in July. Despite trade tensions, the BoC remains on a tightening path, with another rate hike expected in Q4 and two more in 2019.
• Bank of England (UK): Left rates unchanged in June, but the MPC showed a more hawkish stance. A rate hike in August is anticipated, with gradual tightening expected in the coming years.
• European Central Bank (ECB): Announced plans to end net asset purchases by year-end and keep rates on hold through next summer. Rate hikes are expected to begin in late 2019.
• Reserve Bank of Australia (RBA): Maintained a neutral stance, with the cash rate expected to remain on hold in 2018 due to weak wage growth and inflation pressures.
• New Zealand: The cash rate is expected to remain stable in 2018 with a potential increase in 2019.

Interest Rate Outlook

Economic Outlook

| Country | 17Q1 | 17Q2 | 17Q3 | 17Q4 | 18Q1 | 18Q2 | 18Q3 | 18Q4 | 19Q1 | 19Q2 | 19Q3 | 19Q4 | 2018F | 2019F |
|--------|------|------|------|------|------|------|------|------|------|------|------|------|------|-------|-------|
| Canada | 4.0 | 4.6 | 1.7 | 1.7 | 1.3 | 2.2 | 1.6 | 2.3 | 1.8 | 1.7 | 1.7 | 1.7 | 1.9 | 1.9 |
| US | 1.2 | 3.1 | 3.2 | 2.9 | 2.0 | 4.1 | 2.8 | 2.8 | 1.8 | 2.4 | 2.2 | 1.8 | 2.9 | 2.4 |
| UK | 0.4 | 0.2 | 0.4 | 0.4 | 0.2 | 0.4 | 0.3 | 0.4 | 0.3 | 0.4 | 0.3 | 0.4 | 1.3 | 1.4 |
| Euro | 0.7 | 0.7 | 0.7 | 0.7 | 0.4 | 0.6 | 0.5 | 0.5 | 0.4 | 0.4 | 0.4 | 0.4 | 2.2 | 1.8 |
| Australia | 0.3 | 1.0 | 0.5 | 0.5 | 1.0 | 0.5 | 0.8 | 0.7 | 0.8 | 0.7 | 0.9 | 0.9 | 2.9 | 3.0 |
| NZ | 0.8 | 0.9 | 0.6 | 0.6 | 0.5 | 0.8 | 0.9 | 0.8 | 0.8 | 0.8 | 0.8 | 0.8 | 2.8 | 3.3 |

Inflation Outlook

| Country | 17Q1 | 17Q2 | 17Q3 | 17Q4 | 18Q1 | 18Q2 | 18Q3 | 18Q4 | 19Q1 | 19Q2 | 19Q3 | 19Q4 | 2018F | 2019F |
|--------|------|------|------|------|------|------|------|------|------|------|------|------|------|-------|-------|
| Canada | 1.9 | 1.3 | 1.4 | 1.8 | 2.1 | 2.3 | 2.7 | 2.6 | 2.3 | 2.6 | 2.4 | 2.2 | 2.4 | 2.4 |
| US | 2.5 | 1.9 | 2.0 | 2.1 | 2.2 | 2.7 | 2.7 | 2.6 | 2.4 | 2.6 | 2.6 | 2.5 | 2.6 | 2.5 |
| UK | 2.2 | 2.8 | 2.8 | 3.0 | 2.7 | 2.5 | 2.6 | 2.5 | 2.3 | 2.2 | 2.2 | 2.0 | 2.6 | 2.2 |
| Euro | 1.8 | 1.5 | 1.4 | 1.4 | 1.3 | 1.7 | 1.9 | 1.7 | 1.7 | 1.4 | 1.5 | 1.5 | 1.6 | 1.5 |
| Australia | 2.1 | 1.9 | 1.8 | 1.9 | 1.9 | 2.2 | 2.2 | 2.2 | 2.3 | 2.5 | 2.6 | 2.7 | 2.1 | 2.5 |
| NZ | 2.1 | 1.7 | 1.9 | 1.6 | 1.1 | 1.6 | 1.9 | 1.6 | 1.6 | 1.6 | 1.6 | 1.7 | 1.6 | 1.6 |

Currency Outlook

Main Points and Key Insights

• Trade Tensions: The US trade policy has led to increased retaliatory measures, but the impact on growth remains uncertain. The Fed and other central banks are proceeding with rate hikes despite these risks.
• Economic Growth: The US and Canada have shown strong growth, while the UK's growth is expected to rebound in Q2. The ECB's tapering of QE was seen as dovish, with rate hikes anticipated in late 2019.
• Inflation: Inflation remains low in most regions, but is expected to rise gradually due to increased demand and labor market conditions.
• Central Bank Policies: Central banks are tightening monetary policy in response to above-trend growth, with the Fed, BoC, and BoE leading the way. The RBA remains cautious due to weak wage growth.
• Market Reactions: Trade risks have weighed on government bond yields, but central bank tightening is expected to drive interest rates higher. The yield curve is shifting upwards in several countries.

Summary

The financial markets in Q2 2018 were influenced significantly by trade tensions, yet central banks continued to tighten monetary policy in response to strong economic growth. The US and Canada showed robust GDP growth, with the US reaching a 4.1% annualized increase. Inflation remains subdued in most regions but is expected to rise gradually. The Fed, BoC, and BoE are all on a path of rate hikes, while the RBA and NZR maintain a more cautious approach. Currency outlooks suggest a mixed picture, with the CAD and GBP showing some depreciation, while the EUR and NZD are expected to remain stable or slightly rise. Overall, the market is navigating a period of both economic expansion and policy tightening, with trade tensions playing a key role in shaping the outlook.