Fed hikes interest rates despite soft inflation

The central bank also surprises markets with a plan for balance sheet unwinding

CorumJames Ong

As was widely expected, the Federal Reserve (Fed) hiked its benchmark interest rate by 25 basis points today to a range of 1% to 1.25%. While the rate rise was almost 100% priced into the bond market, the Fed’s formal statement leaned hawkish with the unexpected announcement of a plan to scale back its asset reinvestment program by not replacing assets as they mature. The market had not been expecting an announcement on the Fed’s “balance sheet unwinding” plan for another several months.

Ahead of this surprise,

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UK voters deliver another election surprise

A ‘softer’ Brexit looks more likely as the Conservative Party loses power

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One year after the Brexit referendum and two years after the Scottish independence referendum, UK voters have surprised the country and the markets once again, with a dramatically different election outcome than suggested by almost every poll: Instead of an enlarged Conservative Party majority, which Prime Minister (PM) Theresa May wanted to see, the result of the June 8 general election is a “hung parliament” — no party controls a majority.

Thus, the election implies uncertainty and profound challenges for governing the UK in general and negotiating Brexit with the European Union (EU) in particular — and by extension for UK macro and market performance. That said, Invesco Fixed Income believes this latest political shock is more of an idiosyncratic story for the sterling currency and UK government bonds (gilts) than the sudden, but ultimately transitory, global financial shock triggered by the Brexit referendum a year ago.

Over the longer term, however, we believe the UK

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Currency outlook: Global central banks begin to normalize policies

Invesco Fixed Income shares its views of currencies around the world

US dollar:

Our strong global growth view indicates a mixed environment for the US dollar. We expect the US Federal Reserve to hike interest rates two more times in 2017. However, we believe other major central banks have more significant moves to make in terms of normalizing their policies. Global policy normalization should favor currencies of countries whose central banks are scaling back their quantitative easing (QE) programs — for example, the euro versus the US dollar.

Euro:

We continue to be

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Interest rate outlook: Eurozone economy now in “Goldilocks” phase

Invesco Fixed Income shares its views of rates around the world

Europe:

The risks around the French elections are now behind us, and we are unlikely to face a far right insurgency in the next electoral test: Germany. In the background, European data continue to be solid and resilient to political risks. Given the French election’s market-friendly outcome, we expect a renewed focus on fundamentals and European Central Bank (ECB) watching going forward. As post-election short covering winds down, we expect European core yields to resume their upward trend and peripheral spreads versus German bunds to widen again. The periphery could come under more pressure in the unlikely event that early elections are held in Italy.

US:

Stronger global growth is likely to be

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Currency outlook: European economic activity continues to improve

Invesco Fixed Income shares its views of currencies around the world

Euro:

Our outlook for the euro remains constructive over the medium term. European economic activity continues to improve and should eventually allow the European Central Bank to pivot on quantitative easing (QE) and embark on tapering. We expect the euro to appreciate in this environment and this may unfold in Q2/Q3 this year. In general, we believe QE has approached its conclusion and policy adjustments going forward are likely to be skewed toward supporting longer-term euro strength.

Renminbi:

We expect the Chinese currency (onshore and offshore) to trade on the

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Interest rate outlook: European markets return to fundamentals

Invesco Fixed Income shares its views of rates around the world

Europe:

The risks around the French elections have decreased tremendously following the comfortable Macron victory in the May 7 election. At the same time, data out of Europe continue to be solid and resilient to political risks. Given the French election’s market-friendly outcome, we expect a renewed focus on fundamentals and European Central Bank (ECB) watching going forward. As post-election short covering winds down, we would expect European core yields to resume their upward trend and peripheral spreads versus German bunds to widen again.

US:

We are constructive on global growth and believe it will exceed market expectations. Although we expect

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