Since mid-April, developed economies experienced a sharp interest rate selloff, especially in the long end of the curve. The chart above shows interest rate changes since mid-April by tenor and country. Long EUR bonds (10-year & 30-year) sold off the most, pulling USD rates higher. Rates now appear to be stabilizing at marginally higher levels. European and Japanese economies seem to be responding to easier monetary and fiscal policies. In addition, an appreciating USD versus EUR and JPY seems to be helping European and Japanese companies sell more goods and accelerate growth. Japanese and European economic data indicate job gains and more economic output. Developed market economic growth has slightly reduced our global risk premium outlook. However, in our view, risks in the global economy continue to outweigh the recent good news. As referenced by Fed Chair Yellen in a speech on Friday, Chinese growth continues to surprise to the downside. The chart above shows how CNY rates have fallen since mid-April. Emerging economies, by and large, continue to reduce interest rates to induce consumption and growth. Overall global inflation trends are still low, with Russia and Brazil as the material outliers to the general theme of lower developed and emerging market inflation risk. In all, despite the slight improvement to the global outlook, we are skeptical that growth will accelerate sharply to the upside, which will likely help rates stabilize as we push through the remainder of the year.
Sources: Barclays, SNWAM Research