The incoming economic data point to robust global growth while monetary policies remain supportive - even if policy tightening is brought forward somewhat in Europe, subdued inflation should prompt Japan and perhaps even the US to surprise on the dovish side. We keep our preference for equities and for currencies with a hawkish surprise potential.
The year’s second half started well: corporate earnings are generally growing faster than forecast, while the macro data began to surprise on the upside again recently, after a rather mixed June. Equity prices rose (MSCI World All-Countries: +2.7% in July) and our currency positions paid off.
Both lagging and leading indicators point to continued economic growth. The European Union (EU) stood out again, with the Eurozone’s purchasing manager survey reading holding near records - and far ahead of an already constructive global trend (chart 1).
Furthermore, some national EU sentiment indicators kept surging to new highs. For instance, Germany’s Ifo business climate index jumped to the highest since reunification in 1990, tracking a surge in a similar but more sensitive Swedish barometer (chart 2). Sweden’s real gross domestic product, meanwhile, surged to an annualized quarterly gain of 7.1% in the second quarter, far exceeding the consensus economist estimate – and even China’s current growth rate. Such outcomes would not be possible without a robust rebound of European demand and global trade.
Data out of Asia confirmed this picture: South Korea and Taiwan again reported double-digit export gains, as they have been for most of this year. Exports have also been accelerating in China and Japan in recent months, with merchandise imports growing even faster in both economies.
In the US, meanwhile, growth data held up at acceptable levels, but with few – if any – signs of a meaningful rebound in inflation toward the targeted level. In addition, the initial optimism about the relatively new US administration’s economic plans has been largely priced out by now on a macro level (although some positive expectations are still reflected in various stock market sectors). Thus, unless we get stronger-than-expected surges in US wages and/or energy and import prices in the coming months, the Federal Reserve might thus prove somewhat less hawkish that generally assumed at present - while several other central banks now seem likely to take (further) steps toward a gradually tighter monetary policy bias (e.g. in the Eurozone and Sweden, as well as in Canada and Australia).
On the dovish side, the Swiss National Bank (SNB) has few incentives to act against the recent euro rally versus the Swiss franc, which was balanced by weakness in its other holdings, while the Bank of Japan (BOJ) remains the most unreformed dove standing. Despite a domestic mini-boom, Japan is farthest away from hitting its annual inflation target of at least 2% anytime soon, while recent political events help to further entrench its policy regime (see special topic, page 5).
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Note: The next edition of the LGT Beacon is scheduled for 13 September 2017.