Fra BNP Paribas
Inflation data are likely to remain soft over the coming months, after having trended lower since the start of 2017. This is being driven by specific microeconomic factors (for example incentives in the US auto markets or the repricing of data/communication packages), and weaker commodity prices.
The Federal Reserve and the ECB have communicated that they will look through soft data, and we think rates could rise to reflect this. The Fed has hiked twice this year despite knowing headline inflation would drop. Going forward, we expect the Fed to hike rise again before December and to announce balance sheet reduction despite headline inflation declining to 1.25%.
The ECB has joined the Fed, as President Draghi communicated this week that the ECB will ‘look through’ the recent decline in inflation as it prepares to announce tapering later this year. Real yields should be supported by the current slow patch of inflation and the start of the withdrawal of liquidity. We see this as a strong headwind for risky assets.
The recent decline in oil prices has been driven by resurgent supply at a time when inventories remain high. Oil is likely to have reached a floor, in our view, due to further supply increases from Nigeria and Libya being limited, further US oil extraction coming at an increasing marginal cost, and a seasonal increase in oil demand.
In the UK, equities have benefited from the very negative real yield and a weakened GBP. Going forward, however, the Bank of England has become more sensitive to the impact of FX on inflation and may have to deepen its hawkish tone if the GBP weakens further. We expect the link between the weaker pound and higher FTSE100 to weaken. In addition, the decline in the purchasing power of UK consumers and elevated earnings expectations are negative for UK stocks
