The next movement in interest rates is widely anticipated to be down across the US and Europe in lie...
The next movement in interest rates is widely anticipated to be down across the US and Europe in lieu of any tangible improvement in economic fundamentals.
April's global lead indicators disappointed optimists by providing little evidence the global economy has improved since the end of the Iraq war.
Jim O'Neill, economist at Goldman Sachs, notes: 'Most of the data released in the past month supports the notion that growth momentum through April was close to zero in the major economies. The main production indicators are still very soft. US initial unemployment claims continue to climb and hours worked in the US declined by a hefty 0.7% in April.
'The decline in the Institute for Supply Management survey was consistent with continued contraction in the US manufacturing sector. European confidence data remains weak, suggesting business caution is a global phenomenon, not limited to the US. Against this backdrop, we expect rates to fall by another 50 basis points in Euroland and the US.'
Despite the May decision by the Bank of England Monetary Policy Committee (MPC) to hold domestic rates, O'Neill also expects a 50 basis point rate cut in the UK by the end of the year. He bases this on a combination of weak economic activity, a rapidly appreciating euro and falling energy prices.
Tony Dolphin, global strategist at Henderson Global Investors, is also confident the European Central Bank will cut rates in the near term, with the US and UK likely to follow suit.
While consumer spending has held up well in the US, worsening consumer confidence and a weakening labour market may inspire further fiscal easing, he says. Moreover, the UK consumer remains key to staving off recession and falling retail sales could prompt a move by the MPC before the year is out.
'Further easing is possible in the US and UK to support the consumer and falls in European growth and inflation,' Dolphin says. 'A stronger euro should allow the ECB to cut rates.'
Dolphin predicts 25 basis point rate cuts in both the UK and US and a 50 basis point cut in Europe. As such, bond yields will remain low for some months, particularly at the short end, until the market begins to anticipate any change in central bank thinking, he says.
Steven Bell, global chief economist at DWS Investments, mirrors the consensus in expecting widespread rate cuts in the near-term. He predicts the UK base rate will be cut in the next three to six months and the ECB will follow as a combination of falling inflation in the eurozone and a strengthening currency intensifies worries over economic growth rates.
The picture in the US is somewhat more opaque, according to Bell. Although lower oil prices, tax cuts and continued strength in the housing market across the Atlantic are positives, consumers' need to rebuild savings and corporate overcapacity will remain a drag on the US equity market's performance, he says.
'The Fed does not wish to see further disinflation and may indicate that rates will stay low for an extended period,' Bell says. 'It is contemplating unconventional methods of monetary stimulus.'
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