US Treasury yields and the US dollar fluctuated around renewed focus on tax reform, potential for hawkish central bank leadership and ongoing strength in economic activity data. The US Federal Reserve (Fed) kept policy unchanged but described the growth outlook as "solid" for the first time since January 2015. We expect a rate hike in December and we are underweight US rates.
The European Central Bank (ECB) announced it will reduce monthly asset purchases from €60bn to €30bn for nine months from January. European credit markets are expected to receive an elongated technical tailwind as the central bank "will continue buying sizeable quantities of corporate bonds", with reduced purchases being centered on sovereign bonds.
US tax reform gathered momentum with further details released around each proposal, but uncertainty remains around timing and execution of proposed changes. Measures will impact investment grade and high yield markets, as well as sectors, to varying degrees and we see scope for offsetting impacts. Although tax reform may serve as a cash flow tailwind and the macro environment remains supportive, we are cautious in our exposure to corporate credit at this late stage of the cycle due to extended valuations.
At their February Monetary Policy Committee (MPC) meeting, the Bank of England (BoE) unanimously voted to leave interest rates unchanged, and made no alterations to their asset purchase programs. The Bank also revised higher their growth forecasts, but left the inflation outlook largely unchanged.
US Core CPI month over month printed above consensus at 0.349% last week. Core CPI for December was revised down due to seasonal factors.
ECB President Draghi noted rates will not rise this year, but did not comment on the impact of recent EUR strength on the growth or inflation outlook. The absent of the latter comment prompted a hawkish market response with market pricing implying a positive deposit rate (currently -40bps) by 2019. We think market pricing is misplaced given our subdued inflation outlook.