Erste Asset Management Investment Blog

US central bank confirms trend reversal

US central bank confirms trend reversal
US central bank confirms trend reversal
(c) iStock
Created by | Published on | Topics: Know-How
Tags:
Share post:

We have seen a number of trend reversals this year, one of them being the end of the negative growth surprises. The forecast of economic growth and inflation are currently not subject to downwards revisions any longer.

Estimates revised upwards

The US Fed provided a case in point at the FOMC meeting on 14 December. The estimates of economic growth in the USA were increased from 1.8% to 1.9% for 2016 and from 2.0% to 2.1% for 2017. Along with this revision, the future path of the key-lending rates has also been revised. For the end of 2017, the median of the estimates by all the members of the FOMC is now at 1.4% (previously 1.1%); for the end of 2018, it amounts to 2.1% (previously 1.9%), and for the end of 2019, it is 2.9% (previously 2.6%).

Interest rate increase as formal act

The increase of the Fed funds rate of 0.25 percentage points to 0.5-0.75% was merely a formal act. The market participants had been prepared for that move in the previous weeks, as a result of which a higher Fed funds rate was already fully priced in.

US bonds record yield increase, US dollar appreciates

In response, the yields of government bonds have increased, while the US dollar appreciated relative to other currencies. The market had to digest the steeper path of the future Fed funds rate. Are there any factors that suggest continued movements on the market? Firstly, the market has currently a Fed funds rate of about 1.19% priced in for the end of 2017, not 1.4% as suggested by the Fed. Secondly, the revisions are of a cyclical nature: one is often followed by another one.

Stabilisation?

What are the factors suggesting a stabilisation of the market? The press release by the Fed and the press conference by chairwoman Yellen were moderate in tone. Yellen described the revisions of economic growth and of Fed funds rate forecast as limited. In the statement, Yellen referred to consumption growth as “moderate” and to capex in the corporate sector as “weak”. Remarkably, from the Fed’s point of view the short-term risks for the economic outlook are balanced. By contrast, the market has priced in upside (i.e. positive) risks. The statement was therefore not generally hawkish, i.e. not rooted in the fight against excessive levels of inflation.

A lot is already priced in

In addition to the end of the growth disappointments, another important data point emerges for the assessment of the future market movements. The market prices already reflect a significant share of the expected improvement on some levels such as economic growth and inflation.

RESPOND TO THE ARTICLE

Gerhard Winzer has worked at Erste Asset Management since March 2008. Up until March 2009, he was Senior Fund Manager in Fixed Income Asset Allocation; he has been Head Economist since April 2009.

He holds a degree from a polytechnical college and studied economics and business at Vienna University with a special focus on financial markets. He holds a CFA charter and participated from 2001 to 2003 in the doctoral programme for finance at the Center for Central European Financial Markets in Vienna.

From July 1997 to June 2007, he worked in research at CAIB, Bank Austria Creditanstalt, and UniCredit Markets & Investment Banking. His last position was as Executive Director for Fixed Income / FX Research and Strategy. He was responsible for research on asset allocation at Raiffeisen Zentralbank (RZB) in Vienna from July 2007 to February 2008.

Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.

MORE ON THE SUBJECT