Julius Baer: Fed y bonos Eurozona

Redacción - Martes, 21 de Febrero

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ECONOMICS United States: Yellen signals rate hike • The Fed largely relies on a good economy to signal rate hikes rather than to count on vague fiscal policy plans. Financial markets still have not fully acknowledged the Fed’s determination to hike rates three times this year, allowing USD support to gain further traction. Fed Chair Janet Yellen presented the Fed’s semi-annual Monetary Policy Report to Congress last week. In response, the expectation of an interest-rate hike at the next FOMC meeting in March has risen. We firmly believe that there is a high probability that the FOMC could hike the Fed funds target rate to 0.75 to 1% at its next meeting on 15 March. Immediately after Yellen’s presentations,

the probabilities of a March rate hike implied by money market futures rose to 44%, an all-time high. The acknowledgment of the good economic backdrop and a solid labour market show the Fed’s determination to increase interest rates. Furthermore, the hints that the US economy can deal very well with somewhat higher interest rates are an additional sign of the central bank’s readiness. The uncertainty about fiscal policy had been mentioned previously, but does not appear decisive in rate hikes. The publication of the FOMC minutes this week of the meeting on 31 January – 1 February is expected to give more insights how the still-vague fiscal policy plans of the Trump administration are being assessed by the Fed. We expect the FOMC to be cautious in acknowledging the positive growth and inflation impact resulting from the promised tax cuts and infrastructure spending. The gradual rise of rate hiking probabilities leaves room for further advances. The fact that these expectations are largely driven by the good economic situation - ignoring the uncertainty of the fiscal policy outlook and the unsettling policy backdrop – increases our conviction that the US dollar will strengthen further in the months to come. We expect a 3-4% appreciation over the coming months since the expectation will rise that the Fed will deliver its envisaged three rate hikes this year.

 

David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer

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FIXED INCOME

 

Eurozone bonds: Case-by-case politics

 

Investors remain preoccupied by European politics rather than the eurozone economic news.

 

The European Monetary Union is once again undergoing a process of structural divergence rather than convergence. Unlike 2011/12 when the economies of Greece, Italy, Ireland, Portugal and Spain simultaneously fell into recession and the term “GIIPS” was coined to describe economies mired in structural problems, it is nevertheless no longer about the periphery versus the core. As the chart shows, it is more about the political outlook on a case-by-case basis. Compared with the 2011/12 debt crisis in Europe, the economic

situation today is more sanguine. The purchasing managers’ indices will most likely attest to a solid pace of economic expansion for the eurozone as a whole, which would be consistent with rising German bond yields and a better equity market valuation. Particularly Ireland and Spain are growing faster than Germany. Yet investors are shifting their money back into German government bonds, as the widening of the yield differentials shows. Investors seem to remain preoccupied with political news. Given their experience with the ‘Brexit’ referendum and the US elections, they seem to mistrust all polls and prefer seeing the hard facts before investing in French or Italian assets. The French presidential elections, however, are only scheduled for April and May of 2017, and it is open at this point of time whether snap elections will be called in Italy at all. Thus, politics should continue to drive the bonds markets for the weeks to come. Although economic data in the eurozone is widely disregarded by the bond market, it has constantly overwhelmed market expectations since October last year. As aforementioned, we regard the outlook for the eurozone economy as supportive – supportive at least for bank debt that should benefit from lower loan losses and better asset quality.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

 

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Institutions return to Greece aiming to close the second review

 

At yesterday’s Eurogroup an agreement among Greece and the creditor institutions was reached regarding the necessary structural reforms which will help to complete the second review and pave the way for the next bailout disbursement. Reforms in the tax system, pension system and labour market regulation took again centre stage while the primary balance and any debt relief were not discussed. It seems that the International Monetary Fund (IMF) will re-assess its views regarding Greece’s debt sustainability, once the necessary reforms have been legislated, but any debt relief is likely to come after 2018. We remind our readers that Greece’s major payment is EUR6.6bn in July, so there is still some time for the agreement to close with the participation of the IMF. Nevertheless, as the political season in the eurozone begins, it was a step in the right direction that Greece and the institutions agreed on the additional measures necessary to be implemented.

 

It is at great political cost that Prime Minister Tsipras legislates the additional measures but yesterday’s Eurogroup agreement is putting Greece back on track and distances any Grexit-related talks.

 

Eirini Tsekeridou, Fixed Income Analyst, Julius Baer

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