Stealth
Whilst it may soon be ending, the latest economic paradigm that has endured globally has been one of high inflation and economies have been virtually defined by respective central banks’ race to adjust interest rates. Rates are now widely expected to fall later this year, but until they do I conjecture we are still very much within the current phase. This phase of the cycle isn’t one we’re terribly familiar with. In recent economic challenges (the European sovereign debt crisis, the Great Recession to name but a couple), a spike in inflation as a result of the fiscal and monetary policy policies implemented during the crisis era hasn’t prevailed. A lack of familiarity has ensured that there have been few certainties along the way during this phase.
Whichever way the wind has been blowing throughout this period, however, you can usually bet the Eurozone has found itself in a gale. The Eurozone economy was late to the party of adjusting rates higher. Concerns over domestic growth and economic activity led the ECB to sit on its hands when the rest of the world was adjusting policy. Despite aggravating inflation expectations by delaying its tightening cycle, the terminal rate has always been priced lower in the Eurozone compared with that in the UK and US. Growth expectations have also been weak, hampering the Euro. Overall, Europe has been the sick man of developed market economies.
By stealth, this fortune seems to have changed so far this year. Consistent with a rising Euro that this week has endured an above target CPI print and yet another hot US jobs print, markets are starting to price in a more invigored Eurozone economy. The easing cycle in the Eurozone had always been priced to commence several months earlier than similar monetary policy adjustments expected in the UK and in the US. However, there is now very little difference in the pace and commencement date for monetary easing amongst the two geographies. This is thanks in no small part to improving growth expectations within the Eurozone. Take a look at the corporate bond space and the backdrop is increasingly in favour of the Euro. Despite USD looking perhaps undervalued in the short run thanks to the recent sell-off in the Dolar, the fundamentals for the Euro are improving by stealth.
Discussion and Analysis by Charles Porter
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