This is the second part of my 2018 forecast series. Basically, I see a stronger greenback, rising global inflation and the bull market of US Treasuries coming to an end.
Over last two years or so, the US Federal Reserve and other major central banks have either held back hiking rates, moved very slowly, or even continued pumping money into the system.
As I’ve noted in my previous article, the global economy will maintain a strong growth and the oil price may rally further. Against that background, consumer prices are likely to rise next year.
Crude oil is a key raw material, and as such, the oil price has a close relationship with global inflation. A rising oil price usually pushes up inflation, and vice versa. I’ve predicted that the oil price is likely to rebound above US$76.5 per barrel next year.
As such, inflation is expected to pick up due to both demand pull and higher costs.
While the Fed has already been hiking rates, central banks in Europe and Japan are also likely to start tightening or at least cut back or unwind their monetary easing measures next year. And the Fed and Bank of England are set to further tighten monetary policy next year.
It’s widely expected that the Fed will raise rates two or three times next year, according to market surveys and Fed funds futures. However, the US economy may overshoot next year if President Donald Trump successfully delivers his massive tax cut. If that happens, the actual number of rate hikes may be more.
With more Fed tightening on the way, the decade-long bull market of US Treasuries is set to end.
While an immediate selloff may not happen, it could trigger a round of asset rotations, with funds being taken out from the bond market and moved elsewhere, such as global stock markets.
The dollar index saw a sharp pullback this year. But as the US economy is expected to maintain its strength in 2018, and interest rates will go up further, the US dollar should move higher next year.
If the tax reform materializes, repatriation of capital could further underpin a dollar rising trend.
This article appeared in the Hong Kong Economic Journal on Dec 14
Translation by Julie Zhu
[Chinese version 中文版]
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