The major economies of the US, Japan, Euroland and the UK are all at interesting stages in their eco...
The major economies of the US, Japan, Euroland and the UK are all at interesting stages in their economic cycles, which will be driving yield curves over the coming months. The background is complicated by the performance of the oil price, which remains firm despite attempts by OPEC to drive it down.
A major element in the global background is the tightening of interest rates over the past year.
The drag to growth from the increase in rates is complemented by the sharp rise in the oil price. Higher oil prices have the effect of raising the aggregate cost curve of the economy, imparting a downward impulse to growth at the same time as an upward impulse to prices.
This presents a puzzle for policy makers, whether to react to the growth or inflation shock. Fortunately the oil price rise has come at a time when growth is strong but inflation expectations are firmly under control.
The result is policy makers who needed to tighten rates to slow growth have been helped out, so the extent of the move in rates has been modest by the standards of previous cycles. Markets have been willing to look through the short-term effect of the oil price rise, as witnessed by the spreads between conventional bonds and inflation linked bonds.
Going forward, it appears much of the work of taking the heat out of the global economy has been done.
The curve in the US has been losing some of its inversion of late, and this is a trend that is likely to continue. A similar background exists in the UK, where the inversion of the curve is even sharper.
In contrast, the economies of Euroland still seem to be gathering momentum. Helped by a weaker euro over recent months, the strongly-growing peripheral Euroland economies are being joined by Germany and Italy. For Euroland, a virtuous circle may be starting, where stronger growth improves revenue to the government.
Politicians in Euroland know that the electorate will vote for tax cuts rather than budget prudence, and tax cuts will further promote growth.
The curve implications are the opposite of those in the US; interest rates will need to rise further and the curve continue to flatten.
Finally, there is Japan. There is increasing talk that the zero interest rate policy will be ended soon. This could have a positive effect on confidence, sending a message that the Bank of Japan is confident that the recovery is self-sustaining, while doing little in itself to harm growth - still representing as it does a negligible interest rate.
The curve implications are not clear. While a curve flattening could be expected in a rising rate environment the Japanese experience is that the market will sell off sharply, possibly bear steepening.
Denis Gould is an investment manager at AXA Investment Managers UK
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