Daily Insight
Group Economics Macro & Financial Markets Research
23 November 2016
New global forecasts Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Global Macro View: Upgrading our US forecasts – We have updated our global scenario for the economy and financial markets and extended it through to 2018. We summarise the key points here, but more details can be found in various publications on our outlook, which have been published or are set to be in the coming days. We have upgraded our forecasts for the US economy on the view that President-elect Trump and the Republican Congress will pass sizeable fiscal stimulus. We now expect US GDP growth of 2.4% in 2017 (up from 1.9% previously), and 2.8% in 2018. With unemployment already low, this well lead to an acceleration in inflation. So we now expect a somewhat faster pace of Fed rate hikes. Following a 25bp step in December, we expect three hikes in 2017 (from June onwards) and an additional two in 2018H1. Crucially, we take the view that Mr Trump’s protectionist policies will be relatively moderate and that he will not start a full-blown trade war. With that caveat in mind, we think the impact on the rest of the world of ‘Trumpflation’ will be modest. Less impact elsewhere, though significant risks - Our forecast for eurozone growth is broadly unchanged for next year (1.4%) though we do expect a lower euro to contribute to stronger growth in 2018 (1.8%). The ECB is seen continuing QE through to March 2018 eventually before starting to taper asset purchases. Emerging market growth is also roughly unchanged in 2017 (4.4%). Trumpflation is in itself negative for EM: a stronger dollar and higher US Treasury yields are leading to capital outflows leading to tighter financial conditions. However, the impact on our forecast is offset by an upgrade to China GDP growth due to recent better data (to 6.5% from 6%). Indeed, apart from the expected impact of the new US administration, we already see some improvement taking shape in the global industrial cycle. Bringing all the above together, we see global GDP growth rising to 3.4% next year (revised from 3.2%) and 3.5% in 2018. The main risks to our forecasts our more aggressive US protectionism, an escalation of European political risk, and a more pronounced tightening of EM financial conditions. For more please see our Global Macro Outlook – The brave new world of 2017 and 2018 Rates View: Bond yields past their lows – We think global government bond yields have passed their lows, though there are still forces that will moderate the extent of the rise, especially in Europe. We expect US 10y Treasury yields to rise to 2.9% by the end of next year. Although Fed rate hike and inflation expectations have adjusted upwards, we still see some room to go. In particular, financial markets have not fully discounted the likely Fed rate hike path we sketched above. In 2018, we expect Treasury yields to eventually fall back as the Fed rate hike cycle pauses at mid-year and growth slows again in the second half. German government bonds should remain supported in the near term by the extension of ECB QE and weak underlying eurozone inflation. We think the ECB will also remove the deposit rate floor for purchases, leading to a bull steepening of the yield curve. In the latter part of the year, we expect a more significant rise in German 10y yields (to 0.8% by year end), as markets start to price in a tapering of asset purchases in early 2018. We see the US-Germany 10y spread peaking at 220bp in 2017Q3, before narrowing thereafter. Finally, we have generally built in more elevated peripheral spreads in our forecasts due to more pronounced political risks, and later on, tapering expectations.
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Daily Insight - New global forecasts - 23 November 2016
FX view: The last leg up for the US dollar – We have upgraded our forecasts for the US dollar based on early views about the impact of Mr Trump’s economic agenda. The combination of strong US growth – which will also be above inflation in 2017 - wider yield spreads and a rise in (less negative) US real yields (official rates minus inflation) is bullish for the US dollar. Therefore, we now expect that the US dollar will see another leg upwards. It is likely that this move will run out of steam once financial markets have anticipated the strong pickup in US growth and more monetary policy tightening. In addition, the move could start to unwind in 2018 when yield spreads start to narrow, US growth starts to slow and expectations start to surface that the Fed will pause its rate hike cycle. In the coming year (in line with our pattern of US growth, US inflation and yield spreads) we expect the US dollar to rally across the board, but the size of the move will likely be larger versus emerging market currencies because of the sharp pick-up in US Treasury yields. We expect the EUR/USD to break through parity, also fuelled by rising European political risk and an extension of ECB QE. However, a soon as expectations of ECB taper (which we expect from March 2018) start to build in the market at the turn of 2017-2018, this will likely lead to a turn in EUR/USD.
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Daily Insight - New global forecasts - 23 November 2016