Economic Outlook December 2015

Regional Analysis (December 29th, 2015)

USA

At the December Meeting the Federal Reserve increased interest rates to 0.375% and expect them to be at 1.4%  by the end of 2016. The members increased growth but reduced unemployment and inflation expectations.

Eurozone

At the December Meeting, the ECB lowered deposit interest rates to -0.3% extended full allotment fixed tender till the end  of 2017, extended asset purchases till beyond March 2017 include euro regional and local government debt and  reinvest principal payments. They slightly lowered inflation expectations.

Japan

Members of the Bank of Japan monetary policy by a reduced majority extended the maturity of Government Bond  purchases to 7-12 years, they also noted that exports and investment in physical and human capital have been picking up, although business sentiment and inflation expectations have been slowing. Immigration controls need
to be drastically relaxed to aid growth so taxes can reduce Government borrowing.

China

The People’s Bank of China sees mass entrepreneurship and innovation and the supply of public goods and  services forming the engine for economic growth, although downward pressures remained high. They continue to  reduce loan and deposit rates and the reserve requirement ratio. The central parity of the currency against the  dollar was reduced by 1.6%.

UK

The Bank of England expects inflation to stay below 1% for at least the next six months but exceed the 2% target  after two years with no further action. The Governments Autumn Statement means a lower pace of deficit reduction, but still impacting growth. Nominal pay growth appears to have flattened. The Monetary Policy  Committee expects rates to rise gradually and to a lower level than in recent cycles.

Capital Market Outlook December 2015

Asset Class                        December 29th, 2015

  • USA
  • Equities –               Chinese growth concerns and Fed Fund speculation provide short term buying opportunities.  
  • Govt Bonds –         Mild fall in bond prices, but supported by yields.      

 

  • UK
  • Equities –               As per  USA.      
  • Govt Bonds –        Low yields offer no incentive to hold.
  • Currency –             Only gradual increase in interest rates to a low level permits currency downside.

 

  • Eurozone
  • Equities –               Currency fall and QE to aid short term recovery.
  • Govt Bonds –         QE and deflation maintain support.
  • Currency –              Move to monetary easing aid currency’s to fall to fair value.

 

  • Japan
  • Equities –               AS per USA.
  • Govt Bonds –         Declared inflation target scares marginal government bond traders.
  • Currency –              Loose money, low growth and debt downgrades maintain pressure.

 

  • Rest of the World
  • Equities –                Potential to recover on internal rate cuts.
  • Commodities –      Difficult to make headway on US dollar appreciation, awaiting reduction in oil production investment.


Uncertainties

  •        Chinese military developments.
  •        Russia/Ukraine.
  •        Regulation of financial institutions and products.
  •        Religious extremism.