Marilyn Watson, head of Global Fundamental Fixed Income Strategy, BlackRock, comments on Thursdays ECB meeting and global fixed income themes from Bl Global Bond team.
Two important themes are helping to frame our views on the outlook for bond markets this year. The first is an environment of robust and more synchronised global growth, driven in particular by the US and Europe but pulling up economic activity in both developed and emerging markets across the world. The second is the prospect of central banks moving away from incredibly loose monetary policy stances – this is already well underway in the US but focus is now shifting to the ECB, Bank of Japan, Bank of England and other central banks.
These themes have already resulted in plenty of movement in both bond and currency markets to kick off 2018. For example, the yield on the US 10-year treasury has increased from 2.4% at the start of the year to 2.65%, while the 10-year German Bund yield also increased by about 20bps over the same period (source: Bloomberg, 25th January 2018).
To reflect these views, we currently have short duration positions in the UK, various eurozone government bonds and Japan as well as Hungary and Poland.
Today the ECB kept its monetary policy stance unchanged, as expected. This month the central bank continued the implementation of its asset purchase programme at the new lower rate of €30 billion per month, which is scheduled to continue at this pace through September of this year. It also retained the accompanying wording around continuing QE “until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim” of below but close to 2%. The ECB’s target inflation rate, HICP, is currently 1.4% (source: Eurostat, 25th January 2018).
Given the rapid appreciation of the euro against the US dollar (along with a broad range of other currencies), we were looking for any substantive comments on the currency but President Draghi, although mentioning currency volatility, did not take the opportunity to strongly address the euro’s recent appreciation. The EURUSD exchange rate was roughly 1.05 at the start of 2017, 1.20 at the start of 2018 and is currently above 1.25 (source: Bloomberg, 25th January 2018).
In the UK, we remain long the British pound as well as being positioned short duration in government bonds. CPI inflation is running at 3%, above the Bank of England’s 2% target, while unemployment is low at 4.3% (both source: ONS, 25th January 2018). Tomorrow, GDP growth for the fourth quarter of 2017 will be released but the Bank of England’s own forecast for GDP growth for the calendar year 2017 is 1.6%. We believe the central bank will raise interest rates this year.
Finally, we have a wide range of diversified positions in emerging market debt, including China, Indonesia, Argentina and Russia.