Financial Markets Monthly Summary - May 4, 2018
Core Content Overview
This summary outlines the current and projected state of financial markets, focusing on interest rate outlooks, economic growth, currency trends, and central bank policies across major economies including the US, Canada, UK, Euro area, Australia, and New Zealand.
Key Highlights
- Policy Divergence: The theme of policy divergence between the Federal Reserve and other G10 central banks has resurfaced in April, due to the Fed's more aggressive tightening cycle compared to others.
- US Economy: Q1 GDP growth was 2.3%, slightly lower than the previous year but still the fastest in three years. Inflation has picked up, with the Fed's preferred gauge (Core PCE) rising to 2%, and the 10-year Treasury yield approaching 3%.
- Fed Policy: The Fed appears to be on track for three rate hikes in 2018, with the next expected in June. Despite a more measured tone in their latest policy statement, inflation is expected to remain a key factor in future decisions.
- BoC Policy: The Bank of Canada has paused its tightening cycle, with the next rate hike potentially delayed to July. The BoC's cautious stance due to trade policy and competitiveness concerns has led to a revised forecast of only two rate hikes in the second half of 2018.
- UK Economy: UK GDP growth slowed to 0.1% in Q1, and the BoE's May meeting now looks like a close call for a rate hike.
- Euro Area: The Euro area experienced a Q1 slowdown due to weather and labor disruptions, but early PMI data suggest a modest recovery in Q2. The ECB is expected to end QE in June or July and begin rate hikes in mid-2019.
- Australia: Core inflation rose to 2% in Q1, but the RBA remains in neutral due to softer employment data and low wage growth.
- New Zealand: The central bank is also in neutral, with no immediate plans for rate hikes despite some inflationary pressures.
Central Bank Policy Rates
| Country |
Rate (End of Period) |
Last Rate (End of Period) |
Date of Last Rate Change |
| United States |
Fed funds: 1.50-1.75% |
Fed funds: 1.25-1.50% |
March 21, 2018 |
| Canada |
Overnight rate: 1.25% |
Overnight rate: 1.00% |
January 17, 2018 |
| United Kingdom |
Bank rate: 0.50% |
Bank rate: 0.25% |
November 2, 2017 |
| New Zealand |
Cash rate: 1.75% |
Cash rate: 2.00% |
Not specified |
Economic Outlook
| Country |
Q1 GDP Growth |
Q2 GDP Growth |
Q3 GDP Growth |
Q4 GDP Growth |
2018 Forecast |
2019 Forecast |
| Canada |
1.8% |
2.4% |
2.1% |
1.8% |
1.8% |
1.8% |
| United States |
2.3% |
3.1% |
2.8% |
2.8% |
2.8% |
2.4% |
| United Kingdom |
0.1% |
0.4% |
0.3% |
0.4% |
1.2% |
1.4% |
| Euro area |
0.4% |
0.6% |
0.5% |
0.5% |
1.9% |
1.9% |
| Australia |
0.8% |
0.8% |
0.7% |
0.6% |
2.7% |
2.8% |
| New Zealand |
1.0% |
0.8% |
0.8% |
0.7% |
3.4% |
2.9% |
Inflation Outlook
| Country |
Inflation Measure |
Current Period |
Period Ago |
Year Ago |
Three-Month Trend |
Six-Month Trend |
| Canada |
CPI ex food & energy |
2.8% |
2.1% |
1.9% |
2.8% |
2.1% |
| United States |
Core PCE |
2.5% |
1.9% |
2.1% |
2.5% |
1.9% |
| United Kingdom |
All-items CPI |
0.8% |
2.4% |
2.5% |
0.8% |
2.4% |
| Euro area |
All-items CPI |
1.5% |
1.8% |
1.2% |
1.5% |
1.8% |
| Australia |
Trimmed mean CPI |
N/A |
N/A |
1.9% |
N/A |
N/A |
| New Zealand |
All-items CPI |
N/A |
N/A |
1.1% |
N/A |
N/A |
Currency Outlook
| Currency |
Actuals (End of Period) |
Forecast (End of Period) |
| Canadian dollar |
1.29 CAD |
1.26 CAD |
| Euro |
1.23 EUR |
1.26 EUR |
| U.K. pound |
1.40 GBP |
1.35 GBP |
| Australian dollar |
0.76 AUD |
0.70 AUD |
| New Zealand dollar |
0.72 NZD |
0.69 NZD |
| Japanese yen |
106.3 JPY |
120.0 JPY |
Summary of Key Market Trends
- US Dollar: The US dollar rebounded in April as investors anticipated more rate hikes from the Fed.
- Canadian Dollar: The Canadian dollar is expected to remain weak, ending the year at 78 US cents.
- Euro: The Euro is projected to weaken slightly, with the forecast suggesting it will be at 1.26 EUR by the end of 2018.
- UK Pound: The UK pound is expected to decline, with the forecast suggesting it will be at 1.35 GBP by the end of 2018.
- Australian Dollar: The Australian dollar is expected to weaken further, ending the year at 0.70 AUD.
- New Zealand Dollar: The New Zealand dollar is expected to decline, ending the year at 0.69 NZD.
- Japanese Yen: The Japanese Yen is projected to rise, ending the year at 120 JPY.
Key Takeaways
- The Fed's tightening cycle is expected to continue, with three or four rate hikes this year.
- The Bank of Canada is more cautious and may delay rate hikes until July.
- The UK's BoE is now in a close call for a rate hike in May.
- The ECB is likely to end net QE in June or July and begin rate hikes in mid-2019.
- Australia and New Zealand are expected to maintain a neutral stance on monetary policy.
- Inflation trends are expected to continue, but not reach levels that would trigger immediate rate hikes.
- The US dollar is expected to strengthen due to Fed's tightening cycle.
- The Canadian dollar is expected to remain weak.
- The Euro and UK pound are projected to weaken, while the Japanese Yen and Australian Dollar are expected to decline.
