What to expect from central banks in 2019

Poor financial market performance made 2018 a difficult year for investors. But they need not fret, as there’s some relief on the way, according to Luc de la Durantaye.

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CIBC Asset Management’s chief investment strategist and CIO, multi asset and currency management, says a number of factors contributed to slower economic activity at the end of 2018.

“The fallout from trade tension led to policy uncertainty,” said de la Durantaye, who manages the Renaissance Optimal Inflation Opportunities Portfolio, in an interview earlier this month. “You also had unusual events like Brexit that are still ongoing, [and] the Italian budget negotiations that created some uncertainty in Europe.”

Most importantly, he said, the major central banks are moving away from the unconventional monetary policies that have defined the decade since the financial crisis.

Each factor made it difficult for investors to read the financial environment, he said. Now financial conditions are tightening, thanks to a correction in the equity market, a rally in fixed income and widening high-yield spreads.

“All of that is contributing for central banks to take a pause,” said de la Durantaye. “We think that they will be a lot more patient and data dependent at the start of the year, and that may provide some relief to investors.”

Market breakdown

The U.S. is facing a tight labour market, with unemployment at 3.9% after employers added 312,000 jobs in December. Inflation sits near the Federal Reserve’s target of about 2%.

As a result, higher wages may translate into lower profit margins, said de la Durantaye, “which will continue to put pressure on corporate profits.”

This will “lead to an underperformance of equity markets, which will keep the Fed relatively prudent,” he added.

Meanwhile, despite the Bank of Canada increasing interest rates by a quarter percentage on three occasions in 2018, consumer debt levels remain very high. Household credit-market debt as a proportion of disposable income was 177.5% in Q3 2018, notes Statistics Canada.

In addition, crude oil prices declined to US$51.34 per barrel on an annual basis in 2018. “So those are two of the growth engines of the Canadian economy that are going to be in slow motion for 2019,” said de la Durantaye, referring to consumer spending and the energy sector. “That will allow the BoC to be relatively slow in hiking interest rates.”

Looking globally, the ECB has “demonstrated more prudence in the way they plan to renormalize their policy,” he said. A decelerating European economy, with Euro zone inflation at only 1.6% as of December 2018, means the ECB “will have to continue to remain very accommodative.”

Finally, the Chinese economic cycle is “bottoming” and inflation is still low at 1.9% as of December 2018. “Given the trade tension, China is still in a mode of supporting growth, rather than slowing it down,” said de la Durantaye.

As a result, he sees the Bank of China “easing its monetary policy to a certain degree over the course of 2019.”

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