Calls for an extension to the UK’s EU membership may increase, and a vote of “no confidence” in the UK government cannot be ruled out. At its May meeting, the Bank of England (BOE) kept policy unchanged, but revised down growth forecasts for 2018 and said that inflation was cooling faster than previously predicted. The central bank also toned down its language on rate hikes, saying these would be “limited” going forward. The market continues to expect a rate hike in 2018, but against the backdrop of challenging Brexit discussions, we think confidence could diminish significantly over the weeks ahead.
Canada: Neutral. Economic data have been mixed since the Bank of Canada increased the overnight rate 25 basis points in January.2 Employment growth remains positive and consumer price inflation has been firm. However, retail sales and exports have been soft, and housing turnover has fallen since housing policy changes last year caused turnover to be concentrated in the fourth quarter of 2017. The Canadian 10-year yield has traded between 2.08% and 2.38% for most of the year.3
Australia: Neutral. The Reserve Bank of Australia (RBA) held rates steady again at its April meeting. The subsequent statement continued to express optimism for the future while stressing “patience.” Within this statement, the RBA expressed some concern for financial conditions and noted that further global monetary tightening was expected.
Retail sales rebounded in February, but consumer and business confidence surveys have fallen recently, though they remain relatively optimistic. The labor market remains strong, but most new jobs have come from lower-paying sectors — keeping wage inflation lower than desired. The RBA is likely to remain on hold for the foreseeable future, especially as long as inflation and wage growth remain low.
India: Neutral. We like current yield levels from a valuation perspective, and have observed a rally from the highs in early March on the back of lower inflation prints, a favorable government borrowing calendar and the Reserve Bank of India relaxing the mark-to-market rule for government securities.
Going forward, we see inflation as the key uncertainty and the main reason for our neutral stance on Indian interest rates. Inflation averaged about 4.6% in the first quarter of the year, 4 driven by moderation in food prices, while core inflation remained at 5.4% in March. We still expect inflation to average around 4.5% in the second half of 2018, but upward pressure could come from higher crude prices or the government setting higher minimum support prices for crops.
This article has been republished with permission from Invesco Powershares.