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The three-child policy: too little, too late

State media announced today that China’s family planning policy will be relaxed to allow all families to have three children, up from the current limit of two. This comes shortly after China’s once-a-decade census showed that its population is aging even faster than previously expected. The policy shift will do little to alter the downward trend in births, however. It is largely economic and social trends, rather than family planning policy, that are behind the decline in China’s fertility rate in recent decades, much of which predates the one-child policy. With small family sizes now well ingrained into the fabric of Chinese society, there is little that policymakers can do to turn back the clock. The relaxation and eventual abolishment of the one-child policy around the middle of the last decade only nudged up the fertility rate marginally, with the impact on aggregate births quickly overwhelmed by a sharp decline in the number of women of childbearing age. Raising the cap from two children to three will move the needle even less.

31 May 2021

Drop back in bond yields takes pressure off ECB

The fall in sovereign bond yields over the past week may make things a little easier for the ECB Governing Council when it meets on 10th June. We think it is likely to replace its commitment to make “significantly” higher bond purchases than in Q1 with a less specific commitment to keep financing conditions favourable. Next week we expect to learn that inflation got very close to 2% in May (data on Tuesday) while the final PMIs for May will show a big improvement in Spain and Italy (Thursday). Retail sales data for April (Friday) will probably fall in m/m terms as a lot of shops were closed in France. Finally, note that the Capital Economics London “office” will be closed on Monday.

28 May 2021

We think 10-year yields will rise gradually in most cases

While the RBNZ is gearing up to hiking rates next year, we think that most developed market (DM) central banks will look through temporary rises in inflation and leave rates unchanged until early 2023 at the earliest. This feeds into our forecast that the yields of 10-year DM government bonds will rise only gradually, in most cases, over the next couple of years.

26 May 2021
Latest Publications

The stock market rotation may have further to run

Even if, as we suspect, the outperformance of the energy and materials sectors soon comes to an end, we expect the broader rotation in equity markets to continue over the next few years.

The next phase of the stock market rotation

Although we think that the recent outperformance of the energy and materials sectors will soon come to an end, we still expect the financials sector to continue to fare better over the next few years than sectors, such as information technology (IT), which outperformed during the early stages of the pandemic.

PMIs, bond yields & the euro

The latest flash PMIs reinforce our view that the economy will continue to grow at a faster pace in the US than in the euro-zone in the next few years. This feeds into our forecast that long-dated yields will rise more rapidly in the former than in the latter and that the euro will fall back against the US dollar.

We doubt inflation will send the equity rally into reverse

While inflation fears have taken some steam out of the US stock market rally recently, we still think that equities in the US, and elsewhere, will make further gains over the next couple of years.

US corporate bonds versus equities

The relative valuation of stock and corporate bond markets continues to make us doubt that equities in general are in a bubble. It remains very different to the situation before collapses in the US stock market in the late 1920s and early 2000s.

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