17 to 23 July: A World of Difference

Incoming data continues to show global growth has good momentum. Indeed, a number of countries (for example US and Germany) appear to be at full capacity. This should be generating inflation, making it a straightforward job for central banks to raise rates. However, in the new world things are not so easy. First, wage growth is much lower than the historical “Phillips Curve” relationship. Second, commodity prices are subdued – reflecting extensive capacity buildout over the last decade. Third, the extreme liquidity created by unconventional monetary policy has depressed even long-term yields, meaning a change in overnight interest rates could have much larger effects than usual. Last, the developed world is wrestling with lower potential growth than at any other time since the end of the second world war.

In this spirit, last week the ECB struck a dovish tone and the BOJ extended the time horizon for reaching 2% inflation for the 6th time. This week there is an FOMC meeting at which the FED may announce the timing of their balance sheet reduction. More likely, they will stand pat as recent US data (particularly inflation) has been somewhat softer than expected.


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