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Cross-Asset Weekly

An escalating trade war would trigger rate cuts

Basel, 14.06.2019
Next week the FOMC will meet and re-assess its policy stance. Market pricing indicates cuts by more than 50 bp until the end of the year. In Europe market expectations are also skewed to the downside. Therefore, this week we analyse what would trigger rate cuts by the Fed, ECB and SNB this year. In general, we note that inflationary pressure is lower than we and most central banks had anticipated at the beginning of this year. We expect this to lead to another downward revision in the Fed inflation forecasts next week. Low inflation in the US is not a concern (as it is in Europe) but it gives the Fed the room to stimulate the economy if needed. However, economic indicators so far do not show clearly that the weakness in the manufacturing sector is spilling over to the broader economy. The decline in market interest rates should even stimulate the construction sector in the coming months. But continued trade tensions could change this and impact furhter the global investment climate. We expect Mr. Trump and Mr. Xi to find a way to de-escalate tensions between their two countries at the G20-summit. But in case this does not materialize, markets are looking in the right direction. Political pressure on the Fed and implicit attacks on its independence do not help as potentially they could lead to higher inflation expectations.
The ECB has less room to cut rates but faces an economy that is more exposed to global trade than the US is. Market measures of inflation expectations have collapsed in recent months, reaching a historical low, and continued trade tensions could trigger a rate cut through the introduction of a two-tiered system of deposit rates in September. In particular if a monetary hawk is appointed as the next ECB president, Draghi might want to tie his hands before leaving at the end October. Finally, the SNB met yesterday and indicated its readiness to lower rates and intervene in the FX market if needed. We see such a need if the ECB moves first.
Given the above interest rate environment, we review performance trends in equity styles, and recommend sticking to large caps throughout the summer.

This week’s highlights


Global Macro
What will it take for central banks to cut policy rates?

Global Equity Styles
Stick to large cap growth stocks for the summer rally

Economic Calendar
Week of 17/06 – 21/06/2019

Market Performance
Global Markets in Local Currencies

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Further information
Dr. Karsten Junius, CFA  |  Chief Economist

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