Big Picture: The distortions to the economic data are increasingly part of history. Severe cold and snowstorms in the US and heavy snow in Japan have recently had a negative impact on economic activity, making it difficult to gauge what the underlying trends were. Western Europe, on the other hand, had an unusually mild winter. However, with the weather returning to normal, the underlying trends are starting to come through again in the data. And these trends are consistent with our long-held view of a US-led global economic recovery.
Rates: A chasm is opening up between expectations for monetary policy on either side of the Atlantic. Since the FOMC, markets have steadily priced in more significant Fed rate hikes next year. Meanwhile, ECB commentary and low inflation have encouraged a fall back in eurozone rate expectations. This has led to a sharp widening in the US-Germany 5y government bond yield spread. We think this move has further to run, but investor speculation of ECB easing this week might well be disappointed.
FX: The US dollar lost some momentum last week after the post-FOMC rally. The weakness is likely to be transitory as we expect a marked strengthening in the US economic data flow going forward. Meanwhile, the EUR eased lower after Germany’s Ifo was lower than expected and on the back of dovish commentary from ECB officials. The ECB is likely to disappoint investor speculation and keep policy on hold this week but we think widening US-eurozone rate differentials will weigh on the euro in coming months.