Equities, Inflationary Expectations & Tax Reform Complicate Normalising US Financial Conditions
Generous US liquidity creation, courtesy of the Fed, still suppresses the expected returns on risk-free assets, making US equities a natural haven for investors due to their low opportunity cost.
US financial conditions continue to defy Fed policy intentions, thereby helping to further facilitate risk-taking and prolonging accommodation.
Rising inflationary expectations since late-June have stymied the Federal Open Market Committee’s (FOMC) intended rise in real interest rates and boosted financial accommodation, potentially raising the ante to increase the federal funds rate more aggressively.
Corporate tax cuts will raise the incentive for investment grade firms to retire debt, while heavily indebted high yield firms could eventually be adversely affected by the limitation in interest deductibility.
Municipal bond issuance surged during late-2017 to beat tax reform’s capping of state & local government tax deductibility, thereby suggesting lower issuance in 2018 and a supportive backdrop for prices.
The FOMC is aware of the risks of tax reform boosting the economy, but the most important aspect will be whether business expensing of capital spending offsets concerns about the capping of interest deductibility.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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