Macro review of 2017

Synchronized GDP growth

Europe

Growth above potential, 18 quarters of consecutive growth, despite a strong EUR (+12% against USD and 8% on a trade-weighted index). The strength of the Euro area economy was one of the biggest surprise as it grew 2.3% in 2017 and could grow at a similar level in 2018. Recent PMI of 58 consistent with a growth rate of 4%. Main concern would be how much longer can above-potential growth last.

US

Growth above potential with 2.2% for 2017, but somewhat slightly surprised on the downside as markets were expecting fiscal stimulus to boost the economy even more. Furthermore, anticipation of tax cut failed to materialize as only happening now. Drivers of growth not just solid consumer spending but not also supported by investments/capex.

EM

China grew at ca. 6.7%, supported by positive consumer wealth effect stemming from strong property market. EM in a cyclical acceleration and should be growing at 4.9% in 2018.

Rates barely moved, against all odds

Fed hiked three times during the year. It also announced a normalisation of its balance sheet, meaning a QT or quantitative tightening of ca. USD 500m per annum. Despite all this, Treasury only widened by 2bps to 2.4%. Note that consensus was for Treasury to be between 2.75% and 3% by year end – so a big miss that had a detrimental beneficial impact on bonds. Why rates didn’t move is that core inflation didn’t really pick-up (CPI increased from 1.3 to 2.1) and that expected inflation actually declined. Because of the hikes, short part of the curve went up and because of the lack of core inflation, longer part of the curve didn’t move, hence the flattening of the curve.

ECB announced its QE reduction but managed to avoid a taper tantrum. Bund only widened by 20bps to 0.4%. o The strength of EUR is deflationary by nature and core inflation actually picked-up i.e. from 0.2 to 1.5. Inflation expectation actually declined during the year. ECB first the first time acknowledged that we are starting to see inflationary pressure from wage and output gap to potentially close in 2018. But none of that happened during 2017. Yield curve actually widened during the year.

BOE hiked for the first in a decade and Gilt only moved 1bps to 1.19% and this despite inflationary pressures as CP increased from 0.6 to 2.6

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