Back
9 Dec 2015
US: Long-awaited policy normalization should finally get under way – Deutsche Bank
FXStreet (Delhi) – Phil O'Donaghoe, Economist at Deutsche Bank, suggests that the long-awaited turn toward the normalization of US monetary policy should finally get under way, whilst in the year ahead we could also see signals that the monetary spigots in Europe will begin to close as well.
Key Quotes
“While such indications are probably more than a year away in Japan, our team does not expect the BoJ to add to its asset purchases. In a world that has been awash with central bank liquidity for most of the past decade, the central question for the year ahead, therefore, is how the global economy and financial markets will react as the tap on that liquidity begins to tighten?”
“The team concludes that whilst the pivot away from this great monetary experiment is unprecedented and will not be without risks, they expect the world economy and financial markets to weather this turn in policy reasonably well. Supporting this adjustment is the expectation that major central banks -- and the Fed in particular -- will be moving far more cautiously than they have in the past as they withdraw accommodation.”
“Global growth is expected to rebound gradually from the weakest growth rate since the financial crisis in 2015, but still be somewhat weaker than we had projected back in June. Growth in advanced economies is projected to hold steady just shy of 2% over the next three years, with growth in the US slowing to near 2%, Europe's steady recovery continuing and Japan rebounding from disappointing growth this year.”
“Meanwhile, the coming year should see growth in emerging market economies rebound, as the severe contractions in Russia and Brazil moderate and recent declines in export growth are expected to reverse, albeit weakly. Nonetheless, 2016 will be challenging for the emerging markets as falling commodity prices and still-weak global trade growth extend the recent experience with budgetary and balance of payments pressures.”
“China is expected to continue its gradual deceleration, offering little respite to commodity producers. Market interest rates should rise next year – our team sees the 10-year Treasury yield ending the year at 2.5% with risks skewed to the upside – as the market prices a tightening Fed. US credit spreads are likely to widen further as defaults rise moderately, but they do not see Fed hikes proving problematic for credit next year.”
“The US dollar upswing should continue, though at a more modest pace. And our team sees equities remaining resilient and presenting some upside, as long as the rise in rates is limited and orderly.”
Key Quotes
“While such indications are probably more than a year away in Japan, our team does not expect the BoJ to add to its asset purchases. In a world that has been awash with central bank liquidity for most of the past decade, the central question for the year ahead, therefore, is how the global economy and financial markets will react as the tap on that liquidity begins to tighten?”
“The team concludes that whilst the pivot away from this great monetary experiment is unprecedented and will not be without risks, they expect the world economy and financial markets to weather this turn in policy reasonably well. Supporting this adjustment is the expectation that major central banks -- and the Fed in particular -- will be moving far more cautiously than they have in the past as they withdraw accommodation.”
“Global growth is expected to rebound gradually from the weakest growth rate since the financial crisis in 2015, but still be somewhat weaker than we had projected back in June. Growth in advanced economies is projected to hold steady just shy of 2% over the next three years, with growth in the US slowing to near 2%, Europe's steady recovery continuing and Japan rebounding from disappointing growth this year.”
“Meanwhile, the coming year should see growth in emerging market economies rebound, as the severe contractions in Russia and Brazil moderate and recent declines in export growth are expected to reverse, albeit weakly. Nonetheless, 2016 will be challenging for the emerging markets as falling commodity prices and still-weak global trade growth extend the recent experience with budgetary and balance of payments pressures.”
“China is expected to continue its gradual deceleration, offering little respite to commodity producers. Market interest rates should rise next year – our team sees the 10-year Treasury yield ending the year at 2.5% with risks skewed to the upside – as the market prices a tightening Fed. US credit spreads are likely to widen further as defaults rise moderately, but they do not see Fed hikes proving problematic for credit next year.”
“The US dollar upswing should continue, though at a more modest pace. And our team sees equities remaining resilient and presenting some upside, as long as the rise in rates is limited and orderly.”