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Global Monthly - Will the bond sell-off derail the economy?

The global economy has shrugged off repeated shocks, but rising bond yields are emerging as a new challenge to the expansion. Bond markets are mostly pricing higher neutral rates, with fiscal concerns adding to yield increases in France, Belgium and the UK. Higher rates may slow the expansion, but they are unlikely to derail the US or eurozone economies on their own. The growth impact will be bigger in fiscally vulnerable economies, with France facing the twin challenge of consolidation and bigger rate rises. Markets may be overestimating how long policy rates will stay elevated, leaving room for bond yields to fall back next year. Regional updates: Rising yields temper rate hike pace in the Eurozone. We raise our growth forecast in the Netherlands following a strong H1. In the US, narrower inflation reduces the urgency of the Fed to hike. Growth gains momentum in China helped by targeted fiscal support

Updating our scenario: Higher for longer

The recent escalation in the Middle East likely means higher for longer energy prices, inflation and interest rates. Energy supply through both Hormuz and the Saudi East-West pipeline is likely to remain constrained in the coming months. The higher profile for energy prices leads to an upward revision to our inflation forecasts, with a longer period of above-target rates. Economic growth remains resilient near term; will be dampened next year on higher energy prices, interest rates and slower AI capex growth. Faced with a longer period of above-target inflation, central banks are likely to move monetary policy into moderately restrictive territory. We expect 50bp of rate hikes from both the Fed and the ECB before year end, while the door could open for rate cuts by the end of next year. Bond yields are seen heading lower over our horizon as there are more hikes priced in than we expect in our new base case. Rising term premia should drive curve steepening.

ECB Watch - ECB rate hike cycle looks far from over

Global Monthly - Deal or no deal: Does it still matter?

The energy shock is back, but its impact more idiosyncratic than before. A lot of energy is getting through Hormuz ‘dark’, and this lowers the importance of a deal to re-open the Strait. Less important ≠ not important, and a deal would still help restore LNG flows, lower inflation and reduce European energy supply risks. Resurgent energy prices and stubborn inflation are keeping central banks on edge. Markets have probably gone too far pricing hikes…but the risk of more tightening than we currently expect has risen.

Top of Mind - Rising US Treasury yields Q&A

Rising US Treasury yields have been top of mind recently and we have had many client questions on what is driving the market, potential policy interventions and the overall outlook for long-term interest rates. Below, we tackle these issues in a short Q&A format.

Labour market weakness could re-balance Fed concerns

FOMC Watch - FOMC leaves door for September hike wide open

The Fed decided to leave its target for the federal funds rate unchanged at 3.5-3.75%. This was in line with our own expectations and those of the vast majority of economists. However, few would have seen the hold as a done deal. Indeed, financial markets had priced in around a 30% chance of a 25bp hike in the run-up to the decision. In addition, three (Logan, Hammack and Kashkari) of the twelve voting FOMC members dissented, preferring instead to raise interest rates. We had expected to see some votes for hikes, though there was one more dissent than we thought there would be.

ECB Watch – ECB makes way for September hike

The ECB left its key policy rates unchanged at today’s Governing Council meeting, as was widely expected.

Global Monthly - Teflon economy shaking off another shock

The global economy remains resilient in the face of persistent shocks. The AI boom, defence spending and the energy transition ‘capex troika’ are likely to continue supporting growth going forward. Still, AI bubble risk, and sovereign debt dynamics remain a worry.

ECB suggests more hikes to come

The ECB raised interest rates by 25bp at the June Governing Council meeting as was widely expected. Its communication and forecasts suggested that there will likely be more rate hikes to come.