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#Market Strategy — 21.06.2019

Uncertainty Pushes Central Banks To Be More Prudent

Guy Ertz

A slowdown in economic growth in 2020 and a series of rate cuts by the Fed

  • The escalation of trade tensions at the beginning of May between the US and China prompted us to revise our economic scenario over the past few months.

  • We adapt the growth outlook on advanced economies for 2019 after strong Q1 results and dovish measures from central banks. As long as uncertainties caused by trade tensions and Brexit remain, we expect investment plans to be postponed and weak consumption.

  • The growth upside potential for 2020 is thus more limited and will depend on the resolution of uncertainties and improvements on economic fundamentals. We downgraded the outlook more aggressively for emerging markets, especially for India and Brazil.

  • Central banks in advanced economies are adopting a more dovish stance as growth remains fragile and inflation is muted. In particular, we changed our outlook for the Fed and expect two rate cuts this year (July and September) and one more mid-2020. No major change for the ECB outlook but the most likely next move of the ECB would be a cut in the deposit rate, to -0.50% from -0.40% if the situation deteriorates.

  • The change in  our outlook for the Fed has an impact on our US bond yield targets. We now expect the 2-year yield to stabilize towards 1.75% in one year and 2.25% for the 10-year yield over the same time period. We left our bond yield outlook for the German 10-year unchanged at -0.60% and 0.10% respectively.