1. Newsroom
  2. Central banks deliver for now
Menu
Expertise 30.09.2019

Central banks deliver for now

Central banks deliver for now

Government bond yields have rallied significantly this year in anticipation of monetary easing from major central banks, including the ECB and Fed who both delivered this past month.


Crucially, the ECB’s forward guidance is now open-ended and state-contingent, as they plan to keep rates at present or lower levels until inflation robustly converges towards the target, with QE similarly to continue until shortly before the first rate increase. With a lack of inflationary pressures within the region as well as globally, any hawkish shift is therefore unlikely in the near term. We therefore see asset purchases continuing for the foreseeable future, which should provide a backstop for core government yields as well as peripheral spreads, keeping them supported.

If anything, risks still appear to be to the downside for growth globally given the uncertainty that the US–China trade war has resulted in. We thus also think that US government bonds can hold onto gains, especially given the current market pricing where investors are anticipating an easing cycle that is closer to Powell’s “mid-cycle adjustment”, with two rate cuts priced in over the next year. If we do see further growth weakness materialise or geopolitical uncertainties rise, then this may force the Fed to cut interest rates more than anticipated, which makes longs at the front-end of the US rates curve an attractive proposition right now.

For credit markets, we see much of the monetary stimulus described as largely priced into valuations, whilst uncertainty surrounding trade, Brexit and global growth still weighs on the outlook and leaves us cautious in our exposure. Although the ECB did deliver with QE, it was clear to see that the Governing Council was looking to pass on the baton of future stimulus to fiscal authorities, given the lack of unanimity on the QE decision. Similarly at the Fed, the latest dot plot highlighted a split board with regard to the need for further rate cuts this year. Therefore we find it hard to rely on more monetary stimulus to fuel further spread-tightening, given that central bankers may become more reactive than proactive in light of these differing opinions between board members. Bearing this in mind, we will be focussing on the global growth data, looking out for signs of stabilisation in the manufacturing sector, as well the upcoming US–China trade talks, as markets hope for a breakthrough in negotiations.

Global & Absolute Return Fixed Income

Kazmi-Mohammed-150x150px.jpg

Mohammed Kazmi
Portfolio Manager, Macro Strategist

Expertise

Impact investing - Contributing to a more sustainable future

What are the key features of impact investing?

Read more

Actualités les plus lues

Expertise 19.02.2020

Changes in consumption patterns

Despite being fast-moving and quite unpredictable, changes in consumption patterns are expected to reshape the economic landscape.

Expertise 15.04.2020

The Case For Frontier Debt

India’s total infected cases (979) and fatality rate (25) remain low but it has been escalating. According to the World Health Organisation (WHO), this can become overwhelming, if uncontrolled.

Expertise 30.06.2020

Nouvelles perspectives d’investissement 2020 de l’UBP

L’économie globale à la croisée des chemins

A lire également

Expertise 31.07.2020

Gold/Silver: the early stages of a long-term bull market

Spotlight - Despite the impressive 30% rally for gold and 70% rally in silver from the March lows, the precious metals are likely still in the early stages of a long-cycle bull market.

Expertise 31.07.2020

Covid-19: Restez informés avec l'UBP

Depuis l’apparition du coronavirus, l’UBP accompagne et soutient ses clients dans le contexte inédit de cette crise sanitaire mondiale. La Banque vous informe régulièrement de l’adaptation de ses dispositifs aux règles de précaution fixées par les autorités et partage avec vous les dernières analyses de ses experts sur les conséquences de la pandémie pour l’économie mondiale et les marchés financiers.

Expertise 29.07.2020

Podcast - The beginning of the USD bear market

Our Global Head of Forex Strategy, Peter Kinsella, shares his outlook for the US dollar for the months ahead.