The breaking news overnight on Thursday was that China had reduced its target for economic growth to 7% for the year ahead, the lowest level in 15 years. The news was met with a muted response from Asian markets and again generally shrugged off in Europe. In some ways the announcement feels reassuring for a couple of reasons, we believe markets will now have some certainty that the
Chinese Central Bank are fairly confident of meeting that target, secondly comparing that figure to most major global economies it remains pretty impressive. One also has to bear in mind that when the Chinese economy was growing at a rate of 10% plus per annum it was a far smaller economy than it is now. The Chinese economy is 7 times bigger today in GDP terms than it was in 2000.
As the US dollar continues to creep higher so do treasury yields, the ten year bond yield is now 2.13%, the pain continues for bond holders this year. The two year yield (most sensitive to change in rate expectations) is up 15bp in the past month. This continual creep higher in bond yields should be a reflection of a sense of increasing optimism in the US economy, and possible a sense that wages are starting to rise in real terms creating some inflationary pressures. There is now some tangible evidence of wage rises coming through, we recently highlighted Wal-Mart's announcement of across the board increases, Toyota have made similar announcements. In the UK the EY Item Club expect wages to rise this year. Negotiations in Germany led to the largest Union receiving a 3% rise for its workers. Despite this the yield on the 10 year German bund remains stubbornly close to zero, not yet reflecting the change in sentiment in the US and UK. The next Federal Reserve rate meeting is on the 17th of March, we may well get the first signs that the Fed could be closer to June for the first rate rise than September.
Thursday was the day for rate announcements in the UK and Europe. The ECB and the BofE left rates unchanged as expected, also revealed were the details of how the ECB plan to execute the quantitative easing program announced in January. The bond purchases will start on March the 9th, the ECB will buy 60billion euro's a month for at least the next 18 months, they will also continue to buy asset backed securities. Mario Draghi stated that he believed the euro area economy is starting to see the benefits of these announcements, as there are some signs of the European economy improving. To back this view up, Mario Draghi also announced that the ECB was raising their expectations for growth in the euro area for 2015 from 1% to 1.5%. In our view the trend as the year develops, will be for further improvements in growth expectations from the central banks of the other major developed economies.