Weekly Economic Briefing

Behind closed doors

24 May 2016

Global Overview

  • Multilateral efforts to coordinate economic policies continue to trudge forward without notable breakthrough, despite recognition that coordinated action is needed to boost global demand and potential growth.
  • The ECB’s step back from negative interest rates may have been driven by a recognition that negative interest rate policy was turning into a zero-sum game. Alternatively, it could reflect a greater understanding of the pressure they put on bank margins.
  • Regardless of whether policies were coordinated, recent monetary policy decisions have reduced financial stress. However, with the Fed closer to tightening and the BOJ arguing for intervention, such calm might be short-lived.
  • Despite the market pricing in less than one hike beforehand, Fed minutes made it clear that decisions are still data-driven. Should financial conditions warrant a rate increase, June is still on the table.
  • Fed hawkishness and RMB depreciation could bring an end to the recent stability enjoyed across emerging markets. Although Chinese outflows have slowed recently, pressures still persist.
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US

The Federal Reserve surprised markets last week with more hawkish communication, raising rate hike expectations. Whether it happens depends on endogenous and exogenous factors.

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UK

The Bank of England let diminishing rate expectations go unchecked to provide a cushion to the domestic economy. Communication must be careful if and when it wants to challenge these.

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Europe

There is scope to significantly improve policy coordination within the Eurozone. Member states should think about the currency union as a whole if it is to prove successful.

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Japan & Developed Asia

Initial signs are that Japan will be disappointed in its attempts to use its G7 chair to deliver greater policy coordination.

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Emerging Markets

The perceived policy coordination at the G20 was likely no more than temporarily aligned interests. As a result, current FX stability may not last.

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Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

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