With economic activity picking up after a long lull and disinflationary pressures easing, India’s rate cut cycle is coming to an end. In fact, a rate hike—perhaps next year—might be in store, particularly if the decline in oil and commodity prices over the past year reverses course and/or poor weather pushes up food prices.
This week, the Fed lowered its economic growth forecast to roughly 2% for 2015 and painted a slow-growth picture (in the low to mid-2% range) for the next two years. The subdued growth expectations led policymakers to promise a more gradual and shallow rise in official rates over the next few years. We think they are too pessimistic on US growth.
Falling commodity prices and their spillover to incomes and spending remain central to the economic debate in Australia and New Zealand. It would not surprise us to see the RBA reinstitute its easing bias at the next policy meeting, and there’s a reasonable chance the RBNZ could soon follow the RBA down the rate cut path—perhaps as early as June.
Next week probably represents the last chance for the Greek government and its official creditors to reach an agreement and prevent a default. If the negotiations fail, bankruptcy and capital controls are likely to follow. This would not necessarily lead to euro-area exit, but would certainly represent an important step in that direction.
Since the last bout of volatility in mid-2012, global equity markets have been relatively calm, rising by more than 50%. There have been few signs of rising inflationary pressures, and corporations continued to deliver strong earnings growth. But a recent acceleration in wage growth and an uptick in bond volatility may increase uncertainty and test the effectiveness of risk-management approaches.
Moderate global growth and low inflation support accommodative policies. In the US, solid growth is supported by consumer rebound; the path to higher rates will be low and slow. Currency and oil declines push Japan and euro area past initial consensus forecasts. As emerging economies slow, growth gap versus developed economies narrows. In our view, modest returns is expected for equities. For fixed income, we prefer to balance rates and credit; and be selective and go global. For alternatives strategies, valuations support downside protection and opportunities lies in security-selection.