Macro Trends and Views: Four Charts on Key Policy Challenges

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“The chart shows the uptrend in domestically driven US inflation measures, which include services and wages, versus core goods prices, which have been dragged lower by global factors. This divergence has kept the Federal Reserve on hold, but we think the markets are underestimating the risk of rising US inflation as the effect of global factors fade in the coming quarters.”

Tom Teles
Global Fixed Income Team

Europe

“The European Central Bank has been effective at driving funding costs lower across Europe, both through the bank channel and the corporate bond channel. This is supportive for the economy but is hurting bank profitability. We think central banks are taking steps to reduce the impact, but in the near-term, bank revenues and profitability will remain under pressure.”

Alexis Deladerrière
Fundamental Equity Team

Japan

“After the Bank of Japan began ‘Quantitative and Qualitative Easing’ (QQE) in 2013, inflation expectations surged, as yen depreciation caused import prices to rise. However, since 2015, the inflation outlook has deteriorated, partly due to energy prices. Now, despite negative interest rates, inflation expectations have declined further as the yen has appreciated against most major currencies due to risk-off sentiment. This is a key challenge for the central bank.”

Ichiro Kosuge
Fundamental Equity Team

“UK long-term real interest rates have fallen to new all-time lows following the EU referendum and the Bank of England’s rate cut. In other words, the market is pricing UK rates to remain low for a very long time. This is going to create significant challenges for many UK pensions that use inflation-linked securities to hedge against inflation-linked liabilities, as declining real rates have made this hedge a very expensive proposition.”

Andrew Wilson
Global Fixed Income Team