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Julius Baer: sobre la inflación en Europa, el oro y los bonos corporativos USA

Redacción - Miercoles, 16 de Mayo

ECONOMICS Central Europe: Still booming economies with a slight rebound in inflation Central European economies powered ahead in Q1 2018, mostly driven by increasing household consumption as tightening labour markets have led to a strong rise in wages across the region. According to the preliminary gross domestic product (GDP) readings published yesterday, Poland led the race with a yearly GDP growth of 5.1%, accelerating from a 4.9% increase in Q4 2017. In the Czech Republic, GDP growth came out slightly lower than expected but remained very solid, at 4.5% year-on-year (y/y). The Hungarian economy remained stable, expanding by 4.4% y/y as in the previous quarter. While growth momentum should start to slightly ease in the next quarters, Central European economies should continue to grow above the eurozone average. On the inflation side, April data rebounded in Poland and Czech Republic, after several months decline in the consumer price index (CPI), to come in at 1.6% and 1.9% y/y, respectively, while Hungary’s CPI was 2.3%. All remain below the respective central banks’ targets. Thus, we expect the Czech National Bank (CNB), which is the only one that started hiking rates last August, to remain on hold until Q4 2018. However, both the Polish National Bank, which is holding a meeting today, and the Hungarian National Bank are likely to remain firmly on hold until 2019, if not further.


Thanks to increasing wages and low interest rates across the region, Central Europe’s economies have continued to expand solidly in Q1 2018. However, inflation remains subdued for now, thus we expect the respective central banks to remain on hold with the CNB moving first with a further hike towards the end of the year.


Annabelle Rey, Economist, Julius Baer




US corporate bonds: Getting there slowly but surely


The upward trend in USD bond yields continued yesterday after the publication of a decent increase in US retail sales in the month of April, showing that consumer spending is on track for above-trend growth in 2018. Against this background, the bond market is only debating whether the Fed will raise rates another two, three or even four times in the remainder of the year, and earlier phantasies of an early termination of the “quantitative tightening” have all but disappeared. In this context, we note that the average yield of BBB-rated corporate bonds with 5-year maturity has reached 3.93% according to data collected by Bloomberg. A year ago, that very measure stood at 2.75% when we recommended investors keep the power dry and wait for BBB-yields of medium-term bonds to reach 4% to 4.5% before jumping back into the bond market. We are obviously approaching the entry level. What is missing so far is the “washout” in the USD high-yield market. Thanks to very strong oil prices, the subsector of energy issues has performed strongly. That should not mask the problems of the sector in general: high leverage, structural problems like the decline of traditional media and retail houses, and last but not least the large share of “zombie” companies that cannot service their debt out of current income even in optimal market circumstances. For investors seeking more than the risk-free 2.5% of short-dated Treasury bills, we recommend BBB-bonds with 4% rather than BB-bonds with 5.25%. The risk premium is just not sufficient to compensate for the higher default risk of speculative-grade bonds.


We maintain our Underweight for USD high-yield bonds. In addition, we observe that conditions are improving for low-investment-grade bonds.


Markus Allenspach, Head Fixed Income Research, Julius Baer





Gold: Breaking below 1,300


As the US dollar and US bond yields rose to new yearly highs yesterday, gold could not resist the pressure and recorded its biggest daily loss in one and a half years. Sell stops were triggered as prices broke below USD 1,300 per ounce, adding to the downside pressure. Given our expectation of a rebounding dollar, and considering its recent tight relationship with gold, this did not come as a surprise. Amid prevailing negative sentiment, the dollar’s rebound could continue. While leaving some more short-term downside for gold, it should be limited as we do not expect selling in the futures market to spill over into the physical market. We believe there is consensus among investors that prices should move higher rather than lower over the medium to longer term, limiting the likelihood of selling on current levels. Hence, we shift our view to neutral and maintain our three-month price target of USD 1,275 per ounce. Despite our positive longer-term price outlook with targets of USD 1,325 and USD 1,400 per ounce in 12 months and beyond, we believe there is no urgency to turn bullish just yet. We still see the US rate cycle and US dollar in the driving seat for gold. Our economists expect the Federal Reserve to shift their guidance to four rate hikes this year as the economy steams ahead and inflation picks up over the coming months. These short-term rate cycle headwinds should fade as the year progresses, opening up medium- to longer-term buying opportunities. Sustainable upside should materialise once growth concerns creep into financial markets and revive the demand for gold as a safe haven.


As the US dollar and US bond yields rose to new yearly highs yesterday, gold could not resist the pressure and broke below USD 1,300 per ounce. We see limited down-side from current levels and consequently shift our view to neutral. Despite our positive longer-term price outlook, we believe there is no urgency to turn bullish.


Carsten Menke, Commodities Research Analyst, Julius Baer

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