This week was about central banks and rising interest rates. Central bank influence may have been subordinated to political risk in the last 12 months with Brexit, Trump and the French elections, but central banks are not without influence. When central banks stepped in to rescue the economy some 10 years ago their influence grew steadily and was maintained for over half a decade. Their influence may return as they pull out from all out support of the economy and markets. There will be turbulence.

Inflation has been a difficult call. Inflation expectations had only just been rekindled in 2016 before receding again. In Europe, the cycle is a phase behind. Elsewhere inflation has receded with the US. Headline inflation is a soup of many ingredients but what is clear is that manufactured goods have not seen inflation in some time and that the sources of inflation come from services, especially those with monopolistic or supply constrained features such as land, healthcare and education. There are some expectations that the current tightness in the labour market might translate into inflation later in the year. Indeed the Fed has looked beyond current softer data as transient and expects to see firmer prices in future. For now at least, the Fed is holding on to its course of raising rates. With stronger data in Europe, the ECB it seems is also contemplating an exit strategy from full accommodation. The PBOC is already reining in credit after last year’s expansionary campaigns. Even the Bank of England, faced with the turbulence of Brexit and flagging spirits is having to consider raising rates, not to cool the economy but to shore up a sagging currency which is indirectly causing an unhealthy variety of inflation.

At the half year mark we have buoyant equity markets, tight credit markets and even more effervescent valuations. Equities have outperformed bonds, emerging markets have outperformed developed markets, and in credit, returns from IG to HY have mostly been muted with the exception of US non agency RMBS and bank capital securities, both of which have outperformed even the equity markets.

Week ahead:

Jul 3

  • European manufacturing PMI
  • US ISM
  • Fed’s Bullard speaks
  • BoE’s Haldane speaks
  • India PMI

Jul 5

  • European Composite and Services PMIs

Jul 6

  • US ADP employment, ISM Non Mfg, NFPayrolls, Avg Hourly Earnings, Unemployment
  • Germany factory orders

Jul 7

  • Germany, France, UK industrial production
  • UK trade data, GDP est.