DeGroof Petercam: US - 4 rate hikes in 2018

• Economic indicators remain  solid for now, even though some leading indicators suggest that the pace of the recovery is slowing. The aggressive rhetoric on global trade and the fact that Trump’s attention shifted to China contributed to a worsening of business sentiment. Further retaliatory measures are possible if the US escalates tensions. However, both sides seem willing to reach an agreement.

• A tech equity rout in an environment of elevated valuations is not helping confidence either. Still, the economic outlook remains solid. This means that neither trade nor tech worries will easily affect the global recovery. Trade volumes are still growing, corporate profits are on the rise and unemployment rates are reaching new lows. The combination of extremely loose monetary policy, relatively low commodity prices and neutral fiscal policy has come to fruition. So far, however, this is only modestly translating into rising wage and inflation readings. There has been a lot of talk about the death of the Phillips curve but it might be premature to confirm that message. Indeed, the absence of evidence is not the evidence of absence. Inflationary pressures are firming and we expect this to continue. At the same time, other factors including globalization, technological change and digitization, the ageing of the population, insufficient labour union power, lower anchored inflation expectations and sluggish productivity growth suggest that the negative relationship is weaker than before.

• Financial conditions look set to become tighter from here eventually biting into economic activity, perhaps already later this year. Future equilibrium interest rates (and therefore real policy rates) are expected to remain lower compared to pre-crisis standards.

United States - 4 rate hikes in 2018

• . The Fed under new chair Powell hiked interest rates in March. During his press conference, Powell signalled faster rate hikes over the coming years. As things currently stand, we expect the Fed to raise rates a total of four times in 2018.

• Stock market gyrations are not a good measure of the state of the economy. This means that recent bouts of volatility will not be enough to deter the Fed from changing its course. In case significant volatility in financial markets persists and business confidence indicators are affected, it may convince the Fed to be more cautious. A higher Fed funds rate and an increased risk-off sentiment may result in a slight appreciation of the USD, but a significant boost should not be expected, given its current valuation.

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