At the end of 2018 we have seen quite exceptional volatility in the markets. A US government closure, failed Brexit discussions and fears about an escalating US-China trade war drove interest rates and stock prices down to the lowest point in the year.
Some optimism has returned in early 2019. The tone of the most important central bank (the US Federal Reserve) has become more dovish. The US government has reopened. There are signs of progress on the Brexit front.
But frankly as we voiced before: we do not think that the China-US trade dispute can be easily resolved. The divide between Democrats and Republicans in the US is as deep as ever, with investigations into President Trump proceeding step by step. In Europe some optimism regarding Italy has returned, but economic data from Italy suggest it is in for a hard time. In France the "yellow vest" protests have sapped economic growth and the economy is likely in a mild recession as a result. And regarding Brexit: the deadline is nearing and creates many headaches for businesses and affected people. The UK economy too has stopped growing and may go into recession.
In other words, the dust has not settled, is unlikely to settle, and so economic optimism and interest rates are likely to remain subdued.
What does it mean for the 2019 interest rate outlook?
Therefore, count on interest rates staying near their present low level in the next few months, with modest moves for the remaining of the year. Currently interest rates are at the lowest point in about two years—see the figure below. And when there is such uncertainty, there is little reason for large shifts until the uncertainty is resolved.
Interest Rates on 10 year maturity Germany Bunds
Note: mortgages, especially with 10 years maturity tend to be priced relative to these Bunds. The mortgage rates for the least risky customers are about 1% higher than these rates.
The latest macro-economic data indeed underpin this picture of a rather slow economy. Inflation numbers have come in subdued—the latest number of 1.6 % is well under the ECB ceiling of 2%. Early economic growth indicators suggest very mild growth. For Europe as a whole the latest number is 51, which is borderline recession. For Germany, the data is a little better with a mild upturn in January. For the US it is yet better, but nowhere near as good as the fiscal stimulus filled 2018.
Germany Market Composite Purchasing Managers Index (PMI) (50=zero growth)