Investment Desk Bulletin

25 April 2017

Tug of war between strong data & elevated policy uncertainty

IDB 25 04 17.jpg

By Pau Morilla-Giner

In this week's IDB we discuss the recovery in leading indicators pointing to an upswing in global cyclical momentum. While growth in the US is expected to slow below 1% during Q1, business surveys suggest growth nearer 3% in Q2 and we expect the current disconnect between hard and soft economic data to start narrowing.

In the US, business investment seems to have turned following a significant pickup in core capital goods shipments. Along with consumer confidence reaching pre-crisis levels, consumption remains robust buoyed by a strong labour market, firming wage growth and steady house price increases.

The deliverability of President Trump’s policies (both positive and negative for growth) has been a key driver of recent investor sentiment. Of late, as progress has slowed, uncertainty has crept through the market and prompted Bond markets to question whether the reflation trade is to lose momentum. With the Fed waiting for more clarity on fiscal policy, our baseline case is for two further rate hikes in 2017.

European economic conditions continue to firm, with credit conditions improving to match 2011 levels. Also with the Netherlands election hurdle behind us and the expectation of a French Presidential election victory for Emmanuel Macron, political risk has decreased but something we will continue to monitor.

After a period of weakness, Sterling’s prospects look set to improve as the current account deficit starts to narrow and in the likely event of Prime Minister May winning a greater majority in the general election it will reduce the risk of a hard Brexit.