Investment Institute
Market Views

Plotting in the Open


KEY POINTS

  • The Fed seems ready to tolerate accidents on the road to disinflation and maintains an easing narrative
  • We explore the possibility some broad-based monetary and currency disorder could be a consequence of another protectionist push in the US, with a succession of competitive devaluations.

Jay Powell steadied the Fed’s narrative last week, and with the “dot plot” still pointing to three cuts this year, the market was reassured. It seems the central bank has a relatively wide tolerance margin for accidents on the road to disinflation. This dovish message for this year was somewhat offset by an upward revision in the policy trajectory for the next two years and the longer run. This adds to the sense that the Fed believes the neutral rate has increased. This is reinforced by Powell’s point on the strength of the supply-side in the US, which allows disinflation to co-exist with a still very robust economy, an indication that potential growth has improved. The general impression that the global monetary stance is easing or about to ease was further fuelled by the Bank of England’s dovish message last week, together with the Swiss National Bank’s surprise cut.

Yet, beyond this convergence of central banks in the short term, we think there is a distinct risk of monetary and currency disorder as another trade war may be looming with the US presidential elections ahead. Even if they are not necessarily facing the same quantum of additional tariffs on their exports to the US, China and the Euro area may be tempted to allow their currencies to depreciate to maintain their competitiveness. This could be all the more tempting that spontaneously monetary policies could diverge from the Fed’s, as cyclical conditions in the US are stronger than in most of their key trade partners, and levying additional customs duties would in any case lift price pressure on American consumers. Even within NAFTA, tension could rise. The central bank of Mexico has already chosen to cut without waiting for the Fed, as capital inflows attracted by the perspectives of near shoring could excessively raise the already appreciating peso exchange rate. A succession of disorderly competitive devaluations could ensue across large swathes of the world economy, potentially intensifying support for even more protectionist measures,  both in the US and outside the US. 

Download the full article
Download report (529.72 KB)

Related Articles

Market Views

Holding One’s Breath

Market Views

Bonds, bridges, and burdens: China’s local government debt in focus

Market Views

Forget the market noise: Focus on value and the long-term

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Back to top
    Are you a Professional Investor ?

    This website is available in English only and directed at professional, institutional or qualified investors. It is not suitable for retail investors. As such, some of the funds, products and services described on this website are not available for retail investors under the MiFID II (Directive 2014/65/UE). By pressing accept you confirm that you are a professional investor and agree to AXA Investment Managers' Legal Information and Terms of Use.