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As economic growth decelerates, investors should be prepared for policy divergence

Jeffrey Tan
Jeffrey Tan 5/7/2018 8:0 AM GMT+08  • 8 min read
As economic growth decelerates, investors should be prepared for policy divergence
SINGAPORE (May 7): The synchronised global economic growth that spurred equity markets in 2017 is starting to lose momentum. In its place is a seeming divergence. Leading economic indicators show signs of a wobbly economy in some parts of the world, while
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SINGAPORE (May 7): The synchronised global economic growth that spurred equity markets in 2017 is starting to lose momentum. In its place is a seeming divergence. Leading economic indicators show signs of a wobbly economy in some parts of the world, while in other areas inflation is creeping up. And stock markets are sagging as investors price in greater uncertainty for the second half of the year.

Uneven growth rates mean that some central banks, which have mostly adopted easy monetary policies for several years, will now have to tighten more aggressively. Others may have to push back their normalisation schedules. Their various actions have the potential to negatively impact asset markets this year.

At its monetary policy meeting on May 1 and 2, the US Federal Open Market Committee decided to maintain the target range for the federal funds rate (FFR) at 1.5% to 1.75%. The decision was expected, given the steady trajectory of the US economy. The employment cost index, the broadest measure of labour market pressures, recently showed the fastest growth in a decade. And the March private consumption expenditure deflator — the US Federal Reserve’s preferred measure of inflation — hit 1.9% as base effects from a year ago faded. In Singapore, too, economic data has been positive.

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