Global financial conditions remain supportive of growth – NAB

Markets remain calm, with indicators of market stress and volatility such as credit spreads and the VIX index all remaining low and as a result, while several major central banks have raised rates this year – the US Fed, the Bank of England and the Bank of Canada -  broader measures of financial conditions have either remained benign or eased further, explains the analysis team at NAB.

Key Quotes

“The current combination of solid, above trend economic growth, falling unemployment and easy financial conditions would normally signal central bank rate hikes. However, with inflation generally below target in the advanced economies action is likely to be gradual.” 

“While there has been a shift in advanced economy central bank rhetoric away from further easing measures to when to tighten policy, there are still large differences between major central banks.” 

“Over 2018 the US Fed should continue to lead the way. The Fed raised rates three times in 2017 and started to unwind its large balance sheet. We expect another three rate hikes next year as well, conditional on a pick-up in inflation. Market pricing is more cautious for 2018, but even so it still has the Fed tightening policy more rapidly than any other major central bank.  The Bank of England (BoE) is only signalling future ‘gradual’ and ‘limited’ rate rises.” 

“By contrast, other central banks are still in the midst of QE programmes which represent monetary easing. That said, the ECB has scaled back the size of its monthly asset purchases, and the programme will probably end next year. Markets are also debating when it might start to raise rates although this is not likely to happen until the end of 2018 at the earliest. The Bank of Japan continues to target a near zero 10 year government bond yield, and is undertaking asset purchases (although at a slower pace than before) with no change in policy in sight.” 

“While the major global stock markets have been trending up consistent with the improvement in the global economy and still very accommodative monetary policy settings, it has been a different story for commodity markets. After staging a mini-recovery in the first half of 2016, the CRB commodity price index has basically tracked sideways since. However, helped along by OPEC cuts and  geopolitical risks in Iraq, oil prices have recently moved higher.”