reports
- Said Desaque
Protectionism Trumps Labour Market for US Equities, But Fed Chairman R...
Protectionism has replaced labour market conditions as the main focus for US equities. Meanwhile, the long-term growth issue facing Fed policy still remains the same, namely a lower speed limit for the economy. Higher financial market volatility will be tolerated by the Fed under Chairman Powell, thereby suggesting that US equity valuations should recede.
- Said Desaque
Fed Policy & US Equity Valuations: Unresolved Issues Require Attentio...
Current systemic financial conditions, in the wake of higher volatility, will not prevent the FOMC from further tightening. The FOMC will need to convey its conviction behind its forecast of the natural rate of unemployment, and inform markets about the trigger point for faster policy tightening. Despite their recent correction, US equities are still not cheap, even allowing for changes in corporate distribution policy via buybacks.
- Said Desaque
Protectionism Exposes the Pitfalls of US Corporate and Economic Short-...
Economic optimism levels of US corporate insiders and small business owners continue to flourish in Q1, despite higher levels of financial market volatility and the emergence of protectionism. Protectionism will disproportionately impact US CEOs through lower profits and consequently stock prices, thereby highlighting the crucial role of outsourcing in boosting operating margins. The US has always had a feisty trade relationship with Asia, but the most severe sanctions have hitherto been impos...
- Said Desaque
Low US Personal Saving Rate Introduces Economic and Investment Constra...
While current US economic commentary is upbeat about future prospects, the low personal saving rate raises the exposure of the household sector to potential shocks. The decline in the personal saving rate has accelerated since 1990, a period characterised by a larger share of US national income being allocated to corporate profits and a squeeze on workers’ compensation. Lower levels of inflation and economic/financial volatility have contributed in driving the personal saving rate lower, along...
- Said Desaque
US Equities: Solid Fundamentals Hindered by Protectionism and Liquidit...
Fears of protectionism have been periodically presenting headwinds for US equities, but the real test may still lie ahead with protectionists in the ascendency within the Trump Administration. Buoyant earnings and revenue expectations provide solid fundamental support for US equities, suggesting that corporations will still benefit the most from future economic activity. Global provision of liquidity is becoming more nuanced as the Fed shrinks its balance sheet, while the Peoples’ Bank of Chin...
- Said Desaque
Poorly Justified US Protectionism Brings Bad Economic and Fed Policy O...
President Trump’s announcement of impending tariffs on steel and aluminium has raised fears of an escalating trade war that would be detrimental for both equities and bonds due to higher inflation. Steel and aluminium imports into the US are far less significant than finished capital and consumer goods, although their importance in satiating demand has increased over the past twenty years. Legacies stemming from the Great Recession vis-à-vis unfair foreign competition help to explain why capac...
- Said Desaque
A Looming Showdown between US Monetary and Fiscal Policy?
US economic activity in early-2018 continues to expand at an above-trend pace, thereby validating the Federal Open Market Committee’s (FOMC) current forward guidance towards three increases in the federal funds rate. The impending arrival of fiscal policy easing enhances the chances of the Fed’s economic forecasts for 2018 being fulfilled, but there remains considerable uncertainty about the effects of recently passed tax reform. President Trump’s recently submitted FY2019 budget will take the...
- Said Desaque
Weak Dollar: Blame Shifting Expectations on Monetary Policy & Protecti...
The brevity of the recent correction to US equities suggests that US monetary conditions remain supportive for risk-taking. Foreign holdings of US Treasury securities remain significant, although official holdings have fallen in importance since 2011. Foreign influence in US equities is far lower compared to Treasury securities, but overseas buyers have grown significantly in importance for US corporate bonds. Changing policy expectations for overseas central banks have been major reasons for...
- Said Desaque
Inflation Threat Forces Valuation Resets for US Equities and Bonds
US equity investors have recently ignored the healthy outlook for corporate profits, choosing instead to be paranoid about the monetary response to rising wage pressures. History suggests that a late-cycle surge in productivity is unlikely, despite the hype about higher capital spending, while the Fed’s intended policy path corroborates this usual outcome. Rising US wage inflation presents three prospective scenarios for US equity investors, but the Fed will still be confronted with difficult ...
- Said Desaque
US Financial Markets Jolted by Rate Fears & Fed Policy Outlook
The January Employment Situation report jolted US government bond and equity markets due to signs that rising wage inflation is becoming more evident, thereby involving hawkish implications for Fed policy. The Federal Open Market Committee (FOMC) had telegraphed after its latest policy meeting that further interest rate increases are in the offing, but rises will continue to be gradual. Balance sheet reduction by the Fed will lower liquidity levels in the banking system and raise the competiti...
- Said Desaque
US Dollar Becomes the Looming Red Flag for Equities and Bonds
Dollar weakness has put currency and equity markets onto a potential collision course due to the redistributive effects of foreign exchange fluctuations on economic growth and corporate performance. Weakness in the dollar is largely attributable to the continued accommodative stance of US monetary policy, as well as a growing belief that the Trump Administration is not necessarily committed to a strong currency. History suggests no consistent relationship between the dollar and US economic exp...
- Said Desaque
Equities, Inflationary Expectations & Tax Reform Complicate Normalisin...
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 fina...
- Said Desaque
US Wage Inflation: Crucial for Fed Policy and Corporate Profits in 201...
The behaviour of US wage inflation in the aftermath of corporate tax cuts will have important consequences for Fed policy and financial markets. Higher effective labour supply by counting those not in the workforce and wanting a job cannot adequately explain the persistence of a flat Phillips Curve. Evidence of the Phillips Curve operating at the local level is not entirely consistent due to individual states having different natural rates of unemployment. Minimum wage increases by eighteen s...
- Said Desaque
Key US Economic & Financial Issues in 2018
Equity markets are increasingly embracing an end to the Great Disconnect, whereby improving global economic fundamentals underpin rising prices as opposed to accommodative monetary policy. The Fed is likely to continue to raise the federal funds rate after any inversion of the yield curve if the economy remains in its current buoyant mode. The passage of tax reform has put fiscal policy conduct firmly on the Fed’s radar screen, thereby raising the prospect of the Federal Open Market Committee ...
- Said Desaque
Two Big Tests in 2018: Fed's Dovish Policy Outlook & Corporate Capital...
The Fed’s economic and federal funds rate forecasts for 2018 seem both dovish and incompatible, since stronger growth is not being met with a change in forward guidance. Chair Yellen remains unsure of tax reform’s impact on economic growth, but incoming Chairman Powell has the difficult task of having to alter forward guidance in a hawkish manner if required. The prospective path of private sector demand in the aftermath of tax reform will have an important bearing on the direction of US Treas...
- Said Desaque
Questionable US Tax Reform Could Create Headaches for the Fed
The effective tax rate being paid by US corporations is significantly below the current statutory rate, thereby raising questions as to whether the proposed statutory rate reduction needs to be so aggressive. Unincorporated businesses will not enjoy the benefits of the proposed permanent 15 percentage point reduction in the statutory corporate tax rate, because their returns are typically filed on an individual basis. Current tax reform proposals differ from the 1986 measures, notably due to t...
- Said Desaque
Global Liquidity Adjustments Suggest Speed Bumps Ahead
There will be global implications to the Fed’s normalisation of the federal funds rate due to the operation of fixed exchange rates, as well as changes in cross-border capital flows. Sustained US current account deficits have produced huge outflows of dollars to create offshore markets to provide borrowing hubs for foreign entities which are currently susceptible to changes in US monetary policy. Considerable uncertainty remains as to whether global liquidity can be boosted by a recovery in cr...
- Said Desaque
US Equity Dynamics, Yield Curve and Exchange Rate at Variance With Tru...
The dynamics driving higher US equity prices in 2017 have been at variance with the predictions of strategists in the aftermath of President Trump’s election victory, particularly the strength of the information technology sector. Tougher and riskier times are ahead for US equities as the Fed continues to raise its policy rate during an ever ageing economic expansion. Continued flattening of the US Treasury yield curve could thwart the Fed’s plans to raise the federal funds rate funds rate in ...
- Said Desaque
US Monetary Policy: Peering Into 2018
US monetary policy in 2018 will become increasingly dominated by the emergence of supply constraints, particularly in the labour market. Failure to slow the economy to a more sustainable growth path will raise the ante on the FOMC to adopt a more hawkish policy approach. The Fed has extremely limited experience of the economy operating at full employment for a protracted period which increases the risks of a policy mistake being committed, somewhat similar to the late-1960s. Supply-side const...
- Said Desaque
US Economy: Doing Fine With No Help From Congress or the Trump Adminis...
The US economy is currently on course to enjoy its third consecutive quarter of 3%+ growth, largely due to higher capital spending on industrial and information technology equipment. Despite zero policy help from Congress and the Trump Administration, respectable inflation-adjusted wage gains have helped to boost consumer confidence levels to their highest since 2000. US consumers appear to be ignoring political machinations in Washington, since neither Congress nor President Trump appears to ...
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