A leading Wall Street firm predicts global interest rates could fall to three year lows this year — to about 1 percent.
According to Medley Global Advisors’ Ben Emons, the scenario is becoming more likely because inflation is very subdued.
“With all this shock that happened in the fourth quarter and energy prices falling quite sharply, the effect on inflation is going to last at least though the second or third quarter,” the firm’s managing director said Thursday on CNBC’s “Futures Now.”
In a recent note, he points out the the divergence between the dollar and global Treasury yields. If the global economy does not see a material recovery, he explained that deflation could become entrenched.
“Global central banks have responded to what the Fed has been communicating to not only switching to a pause, but basically potentially embarking on quantitative easing again, for example, in Japan,” said Emons. “That, too, drives global interest rates back down, which presumably we can revisit those lows that we saw in 2016.”
Emons sees the 10-Year Treasury Note yield falling as low as 2 percent this year. It hit a low of 1.31 percent in July 2016. This week, the yield traded around 2.7 percent.
He contends these lower interest rates will lead to favorable to stock markets gains around the world, including here at home.
“Earnings still look pretty good and is coming in actually stronger than expected,” noted Emons, who believes Wall Street fears over a global growth slowdown is overblown.
Even though Emons is bullish on the U.S. market, it isn’t his top international pick. He favors Brazil and China.
“I do like Brazil, for example, because the pension reform is really taking a momentum step towards real reform, and it would be very positive for the Brazilian economy,” he said. “It’s already reflected in the stock market, but I think it has a lot more to go.”
As for China, he believes the trade war with the U.S. will be resolved and create excitement.
“[It] would actually give the Chinese market a lot of upside for a rally,” Emons said.