Cash & Liquidity Management

A mixed first-quarter forecast

Published: Jan 2018
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January 2018

As 2017 has drawn to a close, we look ahead to what may lie in store for euro and sterling money market fund investors in the first quarter of 2018.

Eurozone sentiment is buoyed by robust growth momentum

2018 marks the first time in many years that we are not flagging any near-term systemic risks for Europe. Growth momentum is now very strong and sentiment is on the up. With unemployment still trending downwards, we expect consumer confidence and spending to stay high in 2018. But as long as inflation fails to follow suit, we don’t expect rate hikes from the European Central Bank (ECB) until 2019.

This will continue to fuel the growth momentum in the real economy, and we are forecasting the fastest growth in 10 years for 2017. So with rates for 2018 probably locked and the ECB’s balance sheet even larger – a dynamic that is supportive for risk assets – money fund investors may need to wait another year before they benefit from higher rates in Europe.

Post-Brexit fallout is clouding the UK’s outlook

In the UK, Brexit continues to make its presence felt through subpar economic momentum. But post-Brexit growth, despite being relatively poor, has seen the economy continue to outperform the Bank of England’s expectations in 2017.

The currency-induced pick-up in inflation looks like it may well have peaked in late 2017 and should fall back towards target in 2018. The lack of wage inflation is a global phenomenon and the UK, with unemployment at multi-year lows, is no exception. Considering the Brexit overhang, we don’t expect a pick-up in wages in 2018, but it’s an important consideration for the Bank’s Monetary Policy Committee (MPC) when it comes to future rate hikes.

It’s hard to have a strong conviction on the UK economy right now, but lead indicators are clearly pointing to steady, but not spectacular, growth. This could be just enough to justify further tightening from the MPC, as expected, with the Committee’s own caveat that there are “considerable risks to the outlook from Brexit”.

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