In the United States, the economy experienced its usual slowdown at the start of the year, mainly due to weak household spending. However, its gross domestic product (GDP) registered its fastest annual pace of growth since mid-2015.
Despite a slight deceleration in the first quarter, global growth continues on a favourable path. In the United States, the economy experienced its usual slowdown at the start of the year, “mainly due to weak household spending”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI – Banque de Luxembourg Investments. “Compared to the first three months of 2017, however, GDP increased by 2.9%, the fastest annual pace of growth since mid-2015.” In the eurozone, signs of economic slowdown were more explicit as the effects of the euro’s strength started to be felt. As in the United States, the figures should improve during the year.
Central banks in the US and in Europe leave key interest rate unchanged
As expected, the US Federal Reserve left its key interest rate unchanged at its last monetary policy committee meeting at the beginning of May. Fed Chair Jerome Powell gave no new indications on the future course of interest rates. He merely noted that inflation excluding energy and food is now running near – rather than “below” – the 2% threshold. In Europe, the European Central Bank (ECB) also stuck by the monetary status quo. The Council of Governors left its three key interest rates unchanged and did not alter its statement, not suggesting any change to its future intentions. “This continues to point to the ECB ending its asset purchases between September and December this year, with a first interest rate rise in the second half of 2019 at the earliest”, says the Luxembourgish economist. In Japan, the latest industrial production and retail sales figures also point to weaker first-quarter growth, with preliminary estimates due in May. In China, the monetary authorities have slightly relaxed monetary conditions to counteract recent, albeit minor, signs of weakening.
Bond yields climb without any specific trigger
In April, bond yields climbed slightly, although no specific trigger could be identified. “The equity market rally, the oil price rise and a less weak than expected first-quarter US GDP all contributed.” The 10-year government bond yield rose in the United States, in Germany and in Spain, whereas Italy’s benchmark 10-year bond remained unchanged. “Due to the high costs of hedging the dollar exchange risk and the ongoing weakness of euro bond yields, the bond markets hold little attraction for European investors.”
Volatility could return to equity markets
After a difficult first quarter, equity markets rallied in April. The equity markets’ recovery was due to the publication of good corporate quarterly results and the calming of geopolitical tensions on the Korean peninsula. “Given the uncertainties surrounding a potential trade war between the United States and China, the equity markets might well see volatility returning in the coming weeks”, concludes Guy Wagner.
Guy Wagner, chief investment officer at BLI – Banque de Luxembourg Investments