The 10-Year UST yield nears 3%, in part due to higher inflation expectations arising from the increase in the price of crude oil, as well as higher issuance
The IMF maintained unchanged its global GDP growth forecasts for both 2018 and 2019 at 3.9% (April 2018 WEO), slightly above the 3.8% outcome in 2017 -- the strongest performance since 2011. The softness in global economic data during Q1:2018 appears transitory.
The strength of global GDP is mainly attributed to accelerating US growth due to sizeable fiscal stimulus (by 0.6 pps to 2.9% in 2018). The positive effect is expected to start in the second half of 2018 (1.2 pps cumulatively by 2020 according to IMF estimates). Q1 GDP (due on Friday) is expected at around 2% qoq saar, held back by adverse weather conditions. US expansionary measures, however, create a number of risks, with General Government Debt/GDP expected to rise to 111% in 2020 and US 10-Year yields approaching the 3% mark (the highest in five years). In the euro area, PMIs stabilized in April following two monthly declines (see graph below & Economics).
Emerging economies are likely to provide a further boost to global GDP, growing by 4.9% on 2018 and 5.1% in 2019, compared with 4.8% in 2017. Accelerating growth in commodity exporting countries and India is expected to offset a slowdown in China (to 6.6% in 2018 compared with 6.9% in 2017) -- though the latest Chinese data are stronger than expected.
Indeed, GDP growth was exceptionally strong in Q1:2018 at 6.8% yoy. Moreover, the Chinese authorities are unlikely to tighten financial conditions excessively. Indeed, the PBOC cut the Required Reserve Ratio by 1% (to 14%-16%) for a targeted group of banks, providing additional liquidity of RMB 400bn (0.5% of GDP) to the banking system. A risk to policy remains the high level of private (corporate and households) sector leverage, at 208% of GDP in 2017 vs 211% of GDP in 2016.
The IMF foresees broadly balanced risks in the short term, but skewed to the downside in the medium term, mainly stemming from: i) a build-up of financial vulnerabilities as global financial conditions remain loose (Advanced Economies debt ex-financials: 273% of GDP in 2017 versus 237% in 2007 and record issuance by low credit borrowers particularly in the euro area and the UK – see graph below); and ii) a potential protectionist shift in trade policies, as well as geopolitical risks.
Global equity markets remained in positive territory for a second consecutive week, supported by robust corporate profitability and a cautious stance by major central banks (Bank of England). The S&P500 earnings season began on a positive note (actual EPS growth of 18% yoy so far -- see page 3), with DM equity markets up by 0.8% (+1.7% MtD | -1% YtD).
Government bonds sold off, with the exception of UK short-term Gilts (-8 bps to 0.83%), as Governor Carney indicated he was in no hurry to tighten policy at the May 10th meeting. US 10-Year yields rose sharply by 13 bps to their highest level since January 2014 (2.96%), as March economic data came out above expectations. 10-Year Bund yields increased by 8 bps wow to 0.59%.
The USD index recorded modest gains, ending the week up by 0.3% against the EUR to $1.23 (+2.4% YtD). The ECB is expected to keep policy (and policy guidance) unchanged on Thursday, while major announcements regarding the QE programme are expected either in June or July.