Year to date markets have recorded double digit performance in line with improving fundamentals, as forecasters turn to 2018, the first drafts are positive. Variables surrounding growth are in line and risk appears contained within sensible parameters. Monetary adjustment will continue as growth steadies with investment and spending variations determining the pace.
The key risk remains inflation, we are likely to have seen the lows in 2017, commodity prices led by copper but closely followed by steel and oil will support a higher inflation outlook, the labour market must deliver productivity improvements to keep wages in line. Watch for market scares above expectations. The size of accommodation over the last few years is unprecedented and centrals banks are likely to act preemptively on any unexpected uptick.
Term premiums are likely to extend unless global growth requires support at longer term maturities. There are rumors that strong holders in treasuries would hold positions through curve flattening at the long end, if it provided the required necessary additional support to ensure growth stays on track. This would be derailed with above forecast inflation expectations.
In our view the outlook is positive, central bank policy continues to support growth, extension of equity positioning in emerging markets supports a likely positive global outlook. Bond adjustments are likely but size and timing still offer opportunities at acceptable credit spectrums. Commodity, real estate or EM currency exposure are sensible hedges for any inflation forecast scare. Position portfolios for positive growth which allow for central bank surprises.
