In June, the US Federal Reserve (Fed) delivered its expected 25bp rate hike to 1.25% and provided more details on its plans for balance sheet normalisation. Despite core US CPI inflation rising at its slowest pace for two years, the Fed's language was still less dovish than the market expected. The initial market reaction saw developed market government bond yields edge lower given mixed US economic data and a decline in inflation expectations on the back of weaker oil prices. However, towards month-end, a gathering of central bankers in Portugal resulted in an array of hawkish comments, with policymakers seemingly using the event as an opportunity to deliver a co-ordinated message that the period of ultra-accommodative monetary policy is coming to an end. Relatively low yielding government bonds underperformed higher yielding markets as the market quickly re-priced expectations for monetary policy over the coming months. Ten-year gilt yields rose to their highest levels since February (to 1.26%), while 10-year Bund yields also rose to March highs after ECB President Draghi raised the possibility of an earlier than expected shift in its asset purchase programme. US Treasury yields saw a modest selloff, with the trade weighted US dollar falling to its lowest level since October 2016.

Although the US economy is growing above its trend rate and the labour market remains tight - the unemployment rate dipping to 4.3%, a 16-year low - wage growth is relatively benign for this point in the economic cycle, rising just 2.5% y/y. Core CPI inflation increased at its slowest pace for almost two years, rising 1.7% y/y in May. However, the Fed's latest forecasts show that it still expects inflation to move back up to its 2% target in 2018 and 2019, justifying its June rate rise by upgrading its assessment of economic and labour market activity. The Fed also laid out more concrete plans for balance sheet normalisation, which it still hopes to begin before the end of this year. The US Treasury curve initially flattened on the policy decision, but this was reversed by month-end. Ten-year US Treasury yields ended the month at 2.31%.

At its June policy meeting, the European Central Bank left policy rates unchanged and refrained from making any adjustments to its sovereign asset purchase programme. The ECB staff released their latest economic projections in which they cut their inflation forecasts through to 2019, whilst marginally upgrading their growth projections. Our euro area leading indicator continues to suggest above-trend growth in the region over the coming months. However, the latest euro area inflation data came in softer than expected; CPI printed at 1.4% y/y in May, below market expectations. Nonetheless, towards month-end, ECB President Draghi opened the door to a potentially earlier than expected shift in its policy stance by suggesting that the ECB can "accompany the recovery by adjusting the parameters of its policy instruments". Ten-year Bund yields ended the month +17bps higher at 0.47%. EUR/USD ended the month at 1.141 - its highest level since May 2016.

In another election surprise, the Conservative Party failed to win enough seats to form a majority government in the UK general election in early June. The Conservative Party won 318 seats (out of 650 seats) which means that the party is 8 seats short of an overall majority in the UK Parliament. Given this shortfall, the Conservatives are now set to govern as a minority government with support from the Democratic Unionist Party (DUP), in a confidence and supply arrangement (i.e. the DUP provides the necessary votes for a Conservative government on a vote-by-vote basis). Given that both the Conservative and Labour Parties supported the principle of an exit from the EU, the election result is unlikely to stop the Brexit process, but it does call into question the type of Brexit. Our base case is that a soft Brexit is now a higher probability than a hard Brexit given that Conservatives will have to work harder to gain consensus amongst the political parties on its policy positions during the Brexit negotiations with the EU.

Meanwhile, from a monetary policy perspective, there have increasingly been mixed signals coming from the Bank of England about its policy stance. In June, the Bank of England maintained its current stance, as expected, but a split is emerging amongst committee members, with some worrying that inflation could rise more than previously thought. Five members voted to keep policy unchanged, while three voted to hike rates by 25bps. The decision surprised investors, as it signalled a less dovish tilt within the Committee. Separately, Bank of England Chief Economist Andy Haldane also stated that a "partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon". Haldane also argued that the cost of a policy mistake of a rate hike too early versus too late has decreased. GBP/USD ended the month at 1.301, its highest level since mid-May. Although the Canadian economy has been adjusting to lower oil prices in recent years, since H2 2016 the economy has been absorbing excess slack at a much faster rate than the Bank of Canada had expected, increasing the risk of a change of tone in the BOC's language - which has indeed been the case more recently, with market pricing beginning to increasingly reflect the risk of a rate hike in the near term. Our Canadian leading indicator continues to signal an economy growing above its trend rate. At recent policy meetings, the BOC has been acknowledging the strength in recent data and brought forward the timing for when it expects the output gap to close from mid-2018 to early 2018, even as recent inflation readings remain subdued, with core CPI inflation at just 1.3% y/y. Amongst the G10, the Canadian dollar was the strongest performing currency versus the US dollar in June, rising 4%. Emerging market (EM) fixed income assets delivered mixed performance through the month of June. EM local bonds rose for a seventh consecutive month, increasing by 0.5% in US$ unhedged terms. Gains were driven by duration as EM FX offset some of the positive performance. By region, Latin America (+0.8%) and Asia (+0.8%) outperformed, led in particular by a rally in Mexican assets, as Banxico indicated that they had come to an end of their hiking cycle, and markets priced in a stronger pace of rate cuts over 2018 due to the slowing pace of economic activity and weak consumption. EM hard currency debt, however, weakened by 0.1% over the month, driven by the increase in US Treasury yields. On the FX front, EM currencies ended the month flat on aggregate against the US dollar. On the one hand, the softer US dollar bode well for EM FX, while on the other, commodity linked currencies weakened in line with a sharp decline in oil prices. By region, Latin American and Middle East/African FX outperformed, while European and Asian FX ended the month on the back foot, led by RUB, KRW and PHP.

On the macro front, South Africa entered a technical recession in Q1, with the economy contracting by 0.7% on a q/q annualised basis, following a 0.3% decline in Q4. Meanwhile, Moody's announced a one-notch downgrade to Baa3, as expected, while maintaining its negative outlook due to the increase in political tensions and fiscal consolidation concerns. In China, activity and lending data also showed decelerating growth momentum as fixed asset investment slowed to 8.6% year to date and total social financing fell to CNY1.06trn, reflecting signs of a cyclical slowdown as well as policy tightening aimed at reducing leverage. In Romania, the ruling coalition passed a no confidence vote against its own government to oust the existing PM, Sorin Grindeanu. PM Mihai Tudose was nominated and approved by President Iohannis in under two weeks, removing some of the political uncertainty. However, a desire to pursue populist measures keep markets concerned about the fiscal path.

On the policy front, the Reserve Bank of India kept its benchmark policy rates on hold at 6.00% and 6.25% for the reverse repo and repurchase rates, respectively. The inflation trajectory was lowered to 3.5-4.5%, from 5%, for the second half of the fiscal year ending March 2018. Given that inflation has been undershooting projections and growth has been weaker than expected, we expect the bank to cut in August and possibly a second time in October. In Colombia, BanRep cut its policy rate by 50bps to 5.75% as expected, but Peru's central bank left its key reference rate unchanged at 4.0% against market expectations for a further reduction. Both central banks continue to strike a dovish tone, indicating further cuts to come over the summer. Elsewhere, the National Bank of Hungary kept the base rate at 0.9% as expected, but loosened policy further via the HUF3m deposit, by lowering the cap from HUF500bn to HUF300bn for September 2017. The bank said they could ease monetary conditions further if inflation remained "persistently below target".

With respect to currencies we implemented a short USD versus CAD mid-month and booked profits at month-end. We also initiated a short USD versus IDR from mid-month. Lastly we implemented long USD versus JPY, and short EUR versus SEK trades towards month-end. The portfolio continues to invest in a highly diversified and high quality selection of short-dated debt.