US: Driving the shift in global portfolio allocations - BBH

Research Team at BBH, argues that the US is amongst the main force this week which is driving the shift in global portfolio allocations.  

Key Quotes

“There is growing confidence that the Federal Reserve will hike rates next month, and more next year.  Nevertheless, the market does not have two Fed hikes priced in for next year, which suggests scope for additional adjustment.  Two hikes next year will likely be the base case for many forecasts.  The dramatic rise in long-term Treasury yields is the direct consequence of anticipation of fiscal stimulus when the economy is already growing toward trend.  Both US presidential candidates' programs call for fiscal stimulus.  Trump's was larger and included significant tax cuts as well.”

“While many of the comparisons between Trump and Reagan are superficial and faddish, one kernel of truth may be found in the policy mix.  However, the economy that Trump will inherit is significantly different from what Reagan received. Long-term interest rates remain lower than what used to be associated with the current economic conditions and price pressures. ”

“This week's data is unlikely to alter views but may strengthen the appreciation of the solid economic performance since struggling in Q4 15 through Q2 16.  Growth in Q3 is expected to be tweaked up to 3.0% in this week's revision.  The US economic data continues to be mostly reported stronger than expected.  The NY Fed estimates that US economy is tracking 2.5% growth here in Q4, while as of the middle of last week, the Atlanta's Fed model was more optimistic; tracking 3.6%.”

“At the same time, investors will be reminded of the proximity of the Fed's objectives.  The core PCE deflator is expected to have remained steady in October at 1.7%.  The Fed's target is 2%.   At the end of the week, the US reports the November jobs data.  It is expected to show solid, even if not spectacular job growth of 175k-185k.  The unemployment rate is expected to be unchanged at 4.9%, and hourly earnings are forecast to be steady at the 2.8% year-over-year, the highest rate in seven years reached in October.  The bond market and the dollar, given the recent tight link, may be particularly sensitive to a downside surprise in the unemployment rate or an upside surprise in earnings.”

“Many are concerned about the protectionist signals sent by candidate Trump.  The widening of the trade deficit in the coming months as a result of growth differentials may make for fertile ground for the rhetoric to be operationalized.  The implication of less commitment to free trade while the US is a net international debtor (the world owns more US assets than American own foreign assets) is not clear.  Those issues seem to be a medium term challenge, and by the time they are salient the world could look a lot different.”