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US economic performance is likely to warrant further gradual increases in the federal funds rate. Chair Yellen reiterated her view that "waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession."
The housing market saw a marked recovery in both 2016 and 2015. The number of transactions rose by 5% in pre-owned and saw a further very sustained increase of 17% in new-build. Prices are picking up once more, although modestly, rising by 1.7% over 12 months in pre-owned in Q3 2016. However, this boom is not quite comparable to a traditional cyclical rebound, and features some weaknesses. In 2017-2018, we lean towards a scenario featuring a slight rise in 10-year OAT rates and lending rates, leading to a slowly declining trend on the market.
As expected the ECB maintained a dovish stance, downplaying the relatively high inflation numbers of December, and focussed the speech instead on the low and stalling core inflation rate, and on the downside risks. It restated its asymmetrical forward guidance: on rates – they can go lower but not higher over the medium term; on QE – it can be increased in size and in duration but not reduced.
The issue of populist movements does not stop at elections. In the longer term, it poses the problem of the legitimacy of elites and solutions for reconciling democracy and globalisation. In fact, we have now entered into a political cycle, ie, a point in history where politics has taken over from the economy and is imposing its own rationality. There is no going back: we are seing a transition of both internal and external political equilibrium.
Despite an uneven growth profile in 2016, the French economy's growth rate finally looks set to come out at 1.1%. Looking ahead, growth is forecast to accelerate modestly. External support factors will continue to have an overall positive impact, even if oil prices and interest rates are starting to edge upwards. In addition, the positive impact of several economic policy measures bear out our growth forecast, whose dynamism is nevertheless restricted by persistent structural constraints.
US risks are likely to materialise in an increase in long-term rates, an appreciating dollar, and, if the expansionary fiscal policy suddenly propels the nominal GDP growth rate well beyond its potential rate, in a far more aggressive monetary policy, especially from 2018 onwards. In 2017, the Eurozone is less likely to be impacted by real transmission channels than by financial ones, due to the tightening of financial then monetary conditions in the United States, resulting in upside pressure on interest rates, to which will be added pressures from its own political risk. In this way it will be up to the ECB alone to provide minimal visibility and steer interest rates. It will need to soothe anxious, volatile markets with the hope that, in 2018, once those national political deadlines are behind it, Europe will exist in a manner other than through its monetary policy alone.
Fears about 'hard Brexit' have escalated in recent days and that has pushed GBP to fresh multi-year lows. We expect the concerns to linger and lower our GBP forecasts. We expect GBP/USD to finish the year at 1.23 and EUR/GBP at 0.90. Further out, we expect a cautious recovery because we believe that 'hard Brexit' will be avoided and that the UK will able to secure an enhanced free trade agreem ent with the EU in the coming years.
We expect the FOMC to keep policy unchanged at its November 2 meeting with the Fed funds target range maintained at 0.25% to 0.5% and no change in the FOMC's portfolio reinvestment policies. We continue to look for the FOMC to hike rates at its December 14 meeting as part of a gradual pace of rate normalization, including two additional 25 bps rate hikes during 2017.
The housing market has been experiencing a marked rebound since early 2015. Transaction numbers grew 15% in 2015. In mid-2016, cumulative 12-month totals were again up by about 15% and are nudging the high points of the previous, 2004-2007, cycle. Prices have started rising again, even if the trend is still modest. That said, the ongoing boom is fairly atypical, with some clearly upside factors, but also some persistent weaknesses.
Because of an illegitimate, disturbing and – let us say it – highly contestable monetary-policy framework from the ECB, the economic, financial and political future of Portugal lies in DBRS's hands. On 21 October, DBRS will update its opinion on Portugal. If it downgrades the country's credit rating by one notch then Portuguese bonds will no longer be eligible as collateral at ECB refinancing operations nor for QE. Our base-case scenario is that DBRS will not downgrade Portugal and that it will keep its outlook unchanged (stable).
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