Investment Desk Bulletin

22 February 2018

Policy mix shifting both sides of the pond

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By Sanjay Joshi

This week’s macro IDB looks at how fiscal and monetary policy on both sides of the Atlantic is shifting and considers the consequences for asset markets.

Global GDP growth is still improving and there are more frequent signs of inflation edging higher. In the US tax cuts and additional government spending looks set to raise the medium term growth profile by c1.4% in the future years. However, the fiscal shift will result in increasing budget and current account deficits, with Federal debt levels rising towards 100%.

The faster growth and firming inflation backdrop increases the probability of the FOMC raising interest rates three times in 2018 and potentially twice in 2019. As a consequence London & Capital with maintain its position of low interest rate sensitivity within fixed income allocations.

In the UK, GDP growth has slowed to 1.5% and inflation is sticky. In response the Bank of England has changed its tune and become more hawkish. In reality, consumer confidence has waned, retail sales have weakened and the housing market has slowed. Higher wage growth and persistently higher inflation has led the Bank of England to signal two rate hikes in 2018. Unlike the US, the UK budget deficit is shrinking and it is likely that public spending will be raised in 2019.

Three of the trends London & Capital identified at the start of 2018 have already started to play out; higher inflation, faster monetary policy tightening and asset market turbulence. This has reinforced the recent asset allocation decisions London & Capital has taken in order to protect against volatility.