Divyang Shah, Senior IFR Strategist
There were cuts to:
1) the US GDP outlook to 1.7% from 1.9% for 2013 and 2.7% from 2.9% for 2014
2) eurozone cut to -0.6% from -0.4% for 2013 and 0.9% from 1.0% for 2014
3) China cut to 7.8% from 8.1% for 2013 and 7.7% from 8.3% for 2014.
But there was brighter news for the UK and Japan. So what are the key takeaways from all of these growth revisions coming so soon after their previous forecasts in April?
Firstly, the growth downgrade for the US lends support to the Fed’s view that tapering does not mean rate hikes are around the corner.
Second, they highlight that the eurozone has the potential to cut rates further and supports the asymmetry injected in the forward guidance language by the ECB at their July meeting.
Third, the higher growth forecasts for the UK highlights it’s going to be difficult to add credibility to the BoE’s own forward guidance even if policy makers want to describe this as a shift from rescue to recovery.
Fourth, the cut to China’s growth forecasts are very significant as growth slowdown is now viewed as being more permanent and for this year the data seems optimistic.
The implications for financial markets are that:
1) Fed tapering QE are just as important as the China slowdown story in forcing investors out of EM
2) we like the idea of paying GBP at the shorter dated end of the forward swap curve as BoE finds it difficult to distance itself from Fed tapering
3) the BoJ will help to keep the JPY a key funding currency despite the prospect of continued volatility, and
4) the generally riskier environment for bond, equity and FX markets should help the USD especially when EM FX rates are seen as less stable.
