Despite continued momentum in global growth over the past 6 months, government bonds have rallied alongside equities. Last week, hawkish soundbites from central bankers prompted a spike in bond yields, a surge in the EUR and GBP and pushed most equites lower.
It’s important to give some context to last week’s comments and market moves. First, there is surely a case for over-interpretation; policymakers were mostly offering “what-if” analysis, rather than committing to more aggressive tightening. Second, there is still little/no concurrent evidence of a pickup in core inflation. Third, yields remain within their range of the last few months – there has been no breakout move higher.
Overall, we judge that the short-term path for global rates is unlikely to be synchronised. We still believe the US is most likely to tighten further, that Europe (in aggregate) has a lot of remaining spare capacity, which should keep rate hikes on the back foot and removal of QE gradual. Last, we don’t think incoming UK data will be sufficiently resilient to support tightening.
Longer term, we still see monetary policy makers as “damned if they do and damned if they don’t”, unable to manage asset price bubbles and the secular growth slowdown at the same time.
Separately, oil prices have now managed 7 consecutive daily gains, WTI posting an over 8% rise from recent lows after a decline in weekly US crude production.
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