Too much job creation risked putting more upward pressure on interest rates; too little risked undermining confidence in US growth. In either case, the risk that US stock markets would react negatively to this month’s employment report were significant. With stock market indices just barely above their end-March low points and with 10-year interest rate seemingly ready to break through the 3% barrier, the importance of this month’s employment report was greater than usual.
As usually happens in this type of situation, everyone sees what he or she wants to see. One or two additional data points, such as April inflation or oil prices, are probably needed to tip the scales in one direction or the other over the next few days. But one thing is certain: it’s getting complicated.
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This week’s figures from the US Energy Information Administration (EIA) seem to have stopped traders speculating on rising prices in an overheating oil market. Lower inventories, higher production and lower US imports raised doubts about whether the current oil price is fair, after market euphoria in the last few months took it from $46 per barrel on average in June to over $71 on 25 January. The price of Brent North Sea crude, which had been wavering since the previous weekly report, gave way after Wednesday’s figures and seemed on track to end the week below $64.
Bond yields have barely responded to the move so far. However, that may not last if, as we expect, oil prices keep falling and drag metals down with them, since the rise in metals prices in the last few months has little fundamental justification.
If our scenario proves correct, that would seriously change the context, affecting inflation expectations, bond yields, the forex market and the relative performance of emerging markets and individual sectors. Overall, there is a significant risk that developments seen in the last few weeks will reverse as quickly as they occurred.
Although such adjustments could reduce the downward pressure on indexes resulting from fears that interest rates will rise too quickly, they would definitively rule out the reflation scenario that the markets have been overwhelmingly backing since mid-December. In the best-case scenario, this could stall the correction, without necessarily pushing markets back up to their recent highs.
English translation by trafine
Summary – Current economic trends seem particularly favorable, but after taking a step back, we are inclined to be more circumspect than the consensus of economists on the outlook for 2018. Our worldwide scenario has changed little since September. Our global GDP growth forecast for 2017 remains the same, at 3.6%, and we have lifted our 2018 scenario slightly to 3.3% from 3.2%. Upward revisions to our 2017 estimates for the developed world offset the declines we project in emerging markets. Meanwhile, we continue to foresee a modest global slowdown in economic activity next year as a result of reduced US and Chinese growth.
In this context, and amid the structural changes underway, worldwide inflation does not look ready to accelerate. It should fall from 2 % on average this year to 1.8% next year, in the wake of declining raw material prices. With no inflation on the horizon, central banks will maintain their very accommodative bias. Restricted by a persistent flat yield curve, the Fed will have trouble carrying out the three key interest rate increases it has planned. The ECB will remain particularly conservative and is unlikely to have an opportunity to take a position on a future increase in key rates.
The dollar is set to disappoint and maintain pressure on other countries. Japan, now benefiting from a more promising environment, is probably the country best placed to absorb the market’s wariness with regard to the US currency. Our exchange-rate scenario remains unchanged from our September projections and includes a substantial appreciation in the yen.
In the short run, we think exposure to risk is still a viable strategy, so long as it is focused on developed markets. But the current environment requires investors to be ready to change direction at a moment’s notice. For this reason, we have developed a fundamental allocation to complement our short-term, tactical recommendations.
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