The better-than-expected performance of the central and European economies in 2017 contributed to a slight acceleration of the global economic recovery, a rise in global risk appetite, increased pressure on the normalization of unconventional policies by major central banks in Europe and the United States, and the Federal Reserve will start shrinking its schedule in October. And the possibility of raising interest rates again at the end of the year is high, but affected by the continued downturn in inflation, the US debt curve continues to flatten, the dollar remains weak, and the financial environment is loose. The market shows a pattern of low volatility.

Everbright Bank published a research report thatThe global economy is expected to continue to expand and the macroeconomic policy framework of major economies in the fourth quarter is expected to continue, but there is a need to guard against higher-than-expected US inflation.Looking ahead to 2018, global demand is expected to improve further, and factors such as Trump's expansionary fiscal policy and improved crude oil prices are good for US inflation.

If US inflation exceeds expectations, the pace of Fed tightening will accelerate, and US interest rates and the US dollar will rise rapidly. The rapid rise of the two rates in the United States will have an impact on global capital flows and the financial environment. For the United States, as interest rates and the dollar rise faster than expected, which may damage the medium-and long-term economic growth of the United States, the highly valued financial assets of the United States will also face adjustment pressure. At the same time, a strong dollar could hurt US trade competitiveness and increase the trade propensity of the Trump team, and global trade frictions could be a drag on the fragile global economic recovery.

2017 Economic and market performance

(1) Economic performance

The scope of global economic recovery was further expanded in 2017. Since the third quarter of 2017, the economies of emerging economies have continued to expand; loose monetary policies of central banks in Europe and the United States have supported the recovery of the job market, improved consumer and investor confidence, and the pace of economic expansion in the euro area has continued to accelerate; boosted by improved overseas demand and a weak yen, the Japanese economy has continued a weak recovery; the US economy has continued to expand moderately due to continued tight employment and stable domestic demand.

(2) Market performance

Market risk appetite rose, but low inflation still curbed the rise in interest rates. The pace of global economic recovery has accelerated to boost market risk appetite, and pressure on the normalization of unconventional policies by central banks in Europe and the United States has increased, but inflation in Europe and the United States still deviated far from the central bank target in 2017, resulting in some divergence in central bank policy.

1. Us stocks hit a new high.Since the beginning of the year, despite Trump's blocked policies and geopolitical fluctuations, US stocks have continued to hit record highs, with the Dow Jones Industrial, S & P 50 and NASDAQ up 15.5 per cent, 12.2 per cent and 17.9 per cent respectively as of October 16, 2017.Four factors promote: (1) the US economy continues to expand moderately.The US job market continues to tighten, wages rise moderately, consumer confidence continues to improve, and US consumer spending supports a modest economic recovery.

(2) loose financial environment.Since December 2016, the Fed has raised interest rates three times and started to shrink its balance sheet in October, but the Fed's balance sheet remains at a high level of $4.5 trillion and its excess reserves remain at about $2.2 trillion, especially long-end interest rates remain low. the loose financial environment in the United States provides strong support for risky assets.

(3) the overall profit of the enterprise is ideal.Since the beginning of the year, the overall performance of American financial, science and technology enterprises has been satisfactory.

(4) there is still hope for Trump's tax reform.The hurricane has broken the political deadlock in Washington to some extent since September, and the Trump team is still expected to launch a "compromise" tax reform plan.

2. The curve of US debt is flattened.In September 2017, the Fed's hawkish performance exceeded market expectations. The Fed has always decided to start shrinking the table in October and expects that there is still a possibility of raising interest rates by the end of the year, but the US bond yield curve is still flattening. The spread between five-and 30-year US Treasury yields continued to narrow near 90BP, while the spread between 10-year and 2-year Treasuries narrowed to about 78BP, both close to their lowest levels since the end of 2007.

According to the report, this is mainly due to the following factors:(1) inflation remains low.The link between employment, wages and inflation in the US is weak, and the US job market is fully employed, but the performance of wages and inflation remains weak. In September 2007, core PCE in the US rose 1.3 per cent year-on-year, which was weaker than expected and fell for two consecutive months. Persistently weak inflation has made the market worried about the outlook for the US economy and suppressed long-term interest rates.

(2) impact of political factors.Since the beginning of the year, market demand for safe haven assets has increased due to the obstruction of "access to Russia", Trump's policies, the North American Free Trade Agreement, the US-Mexico border wall, the US-DPRK crisis, frequent terrorist attacks, and geopolitical risks in the US, Iraq and the Middle East.

(3) the Fed's bloated balance sheet.Although the Fed continues to raise interest rates to push up short-end interest rates, the Fed has a balance sheet of $4.5 trillion and the market is still full of liquidity, as investors increase the allocation of high-yield bonds because of generally high valuations of assets such as equities.

The US dollar continues to weaken.The dollar has continued to weaken since the beginning of the year, with the dollar index falling by about 12.7% as of the end of September.Three factors: (1) Trump deal cooled down.Since April, the continued cooling of Trump deals and market expectations of Trump's protectionist tendencies have been a drag on the dollar's continued weakness due to political and other factors.

(2) strong euro.The pace of eurozone economic expansion continued to accelerate in the first half of 2017, and Draghi's optimism about the economic outlook in June sparked rising expectations of broad ECB cuts, with the euro rebounding strongly after hitting 1.04. As of October 16, 2017, the cumulative appreciation of the euro against the US dollar reached 12.7%. The strong rebound of the euro dragged down the dollar, while the strengthening of non-US currencies such as sterling and Canadian dollar also weighed on the dollar bulls.

(3) the US economic data is weak.Since the beginning of the year, the overall unsatisfactory US economic data, especially the weak performance of US wages and inflation, have triggered market worries about the future of the US economy.

4. The commodity market is active.The commodity market continued its 2016 rally in 2017. as of October 13, 2017, the CRB commodity index rose 1.7%, of which metals rose 10.5%, industrial raw materials rose 2.4%, but food commodities rose by about 0.7%.Three factors: (1) China's real estate and infrastructure investment.A bright spot in 2017 is that China's real estate continues to expand, the management adopts city-specific policies and differential credit, the property market shows differentiation, the third and fourth lines show a simultaneous rise in volume and prices, and real estate investment continues to expand.

(2) supply reform.China continues to reduce excess capacity and seasonal demand fluctuations, leading to supply and demand fluctuations, which encourages speculative capital enthusiasm.

(3) loose financial environment.Despite the Fed's rate hike, central banks such as Europe and Japan have maintained ultra-loose monetary policy, and liquidity has continued to ease around the world.

2018 uncertainty outlook

According to the report, the risks facing the world in 2018 come from higher-than-expected inflation and trade protectionism in the United States.

(1) weak inflation continues to suppress interest rates in 2017

In 2017, CPI and PCE in the United States still lagged behind 2.0%. In particular, the core PCE in the United States fell for two consecutive months in August compared with the same period last year, causing market worries about the outlook for inflation in the United States. Since December 2016, euro zone CPI has been running above 1.0% year on year, but it still restricts price resistance in the euro zone, with inflation hovering around 1.5% in recent months. Japan's CPI rose 0.7 per cent in September from a year earlier, the highest since April 2015, but still far from the central bank's target. Inflation in European and American economies has been far from the central bank's target for a long time, raising concerns about the economic outlook. Persistently weak inflation suppresses long-end interest rates and flattens the bond yield curve.

(2) the world faces the risk of rebound in inflation in 2018?

The report believes that there is some uncertainty about inflation in 2018, mainly due to the further expansion of the scope of global economic recovery in 2017, Trump's expansionary fiscal spending, the continued tight job market in the United States, and other factors that may boost the better-than-expected performance of US demand. At the same time, the global economic recovery has accelerated, with crude oil prices rebounding faster than expected or accelerating inflation.

1. The demand is further improved.(1) US demand is expected to continue to expand. Judging from the trend of PMI in the four major economic systems, overseas demand is expected to further boost the US economy, while US domestic demand will also be strengthened.

(2) Trump's fiscal expansion policy. Judging from the current information, Trump is still expected to launch a "compromise" tax reform plan, in which the US government's tax cuts for the middle class will significantly boost consumer confidence and help expand demand, at least in the short term.

2. The US job market continues to tighten.In September 2017, the US unemployment rate hit a record low of 4.1%. Judging from indicators such as job vacancies and the number of people applying for unemployment benefits for the first time, the US labor market is expected to tighten further, and wages in some parts of the United States have shown some signs of acceleration. Optimistically, the US job market will remain tight in 2018 and wage growth will accelerate, which is seen as a necessary condition for accelerating inflation.

3. The price of crude oil is higher.Since the end of August 2017, hurricanes and geopolitical fluctuations in the Middle East have had an impact on the global supply side of crude oil. Bent crude oil prices have risen from a low of $44.60 on June 21, 2017 to $57.8 on October 16, 2017, while US inflation was driven by a surge in gasoline prices to 2.2 per cent in September.

Looking forward to 2018, the crude oil supply side will face the impact of two major uncertain factors: (1) it will take some time for crude oil production to resume.This round of hurricanes hit the Gulf of Mexico, Texas and other important oil producing areas. Texas's oil and natural gas production accounts for 3% and 4% of the U.S. oil output, respectively, and its refining capacity accounts for 3% of the total oil refining capacity. According to the data, the impact of hurricanes on Texas oil production has not abated.

(2) there is uncertainty in US-Iran relations.Relations between the United States and Iran have deteriorated recently. once the United States resumes sanctions against Iran, the supply of Iranian crude oil will be curbed, and the international supply of crude oil will be reduced by 50-1 million barrels per day. A significant rebound in crude oil prices in 2018 could contribute to a strong return of US inflation.

(C) of the impact?

According to the report, if inflation exceeds expectations, investors may see a significant acceleration in the pace of Fed policy tightening in the second half of 2018, and Fed policy is unwilling to lag behind inflation.

1. The "two rates" rebounded strongly.If US inflation exceeds expectations and superimposes the tax reform effect of Trump's policies, market interest rates and the dollar will react quickly. (1) the market interest rate is rising rapidly. The higher-than-expected performance of US inflation will significantly steepen the bond curve for the rapid repair of long-end interest rates. (2) the US dollar rose strongly. The accelerated pace of Fed monetary tightening will cause the dollar to appreciate faster than expected.

2. The pressure on non-US currencies is rising.The higher-than-expected rise in US interest rates and the US dollar, the return of emerging market capital to the United States may accelerate, the pressure on emerging market currencies increases, and the risk of financial asset adjustment in emerging economies increases, especially in economies with weak fundamentals and high asset valuations.

3. Us stocks may have adjustment pressure.If policies such as Trump's tax reform in 2018 hit the ground and may stimulate market risk appetite in the short term, US stocks are expected to continue to hit new highs in the first half of 2018, but persistently high inflation or even higher-than-expected inflation, investors will expect the Federal Reserve to accelerate policy tightening. The accelerated rise in interest rates and the dollar may be a drag on the US economic recovery, and the issue of high valuations in US stocks may put an end to the bull market in US stocks. Another scenario: Trump's tax reform has been blocked again in 2018, but inflation has exceeded expectations, and US stocks may enter the adjustment more quickly. The sharp correction in US stocks makes the market question the mistakes in Fed policy, which is good for US Treasuries, and the curve of US Treasuries may be flattened again.

4. The strength of the US dollar may intensify trade protection.The higher-than-expected dollar will weaken the US competitive advantage, is bound to intensify the protectionist tendencies of the Trump team, and intensify global trade frictions, which will have a serious impact on slightly stabilizing and recovering global trade, and the world may once again face downside risks. (editor: Jiang Yu)