15 FEB
2017
United States: accelerating activity amid a foggy outlook
Activity indicators – combined with GDP growth estimated at 1.9% in Q4 – continue to point to further acceleration, and are supported by solid consumption and a lesser drag from corporate spending. Consumer confidence remains very high while the labour market has continued to improve despite the recent slowdown in average hourly earnings. However, with the economy close to full employment, wages should, at some point, accelerate further and support the rise in inflation. Given the moderate wage growth, the Fed is in no hurry to hike and will adjust the pace of its tightening to any change in financial conditions and the intensity of the fiscal stimulus. The corporate tax reform promised by Donald Trump could take longer to finalise as the budget resolution must be agreed to by the House of Representatives, the Senate and the Office of Management and Budget. As a result, our GDP forecasts for the United States now stand at 2.4% for 2017 and 2.6% for 2018, assuming a moderate pace and magnitude for the coming policy stimulus.
Euro zone: resilient-to-lasting political uncertainty
Recent surveys point to some acceleration in activity, with a still-improving economic sentiment and stronger PMI indices. Business confidence remains high, although the German Ifo index weakened somewhat in January. Meanwhile, consumption – supported by an improving labour market – should remain well oriented. Furthermore, the higher oil price is expected to push inflation towards 1.5% on average in 2017, while core inflation remains subdued. Exports should continue to progress at a moderate pace thanks to a lower euro. Separately, the ECB should remain accommodative, given the lingering political risk and rising bond yields.
In this context, we have revised upwards our GDP forecasts in the euro area to 1.6% for 2017 and 2018.
The expected monetary policy gap between the US and the rest of the world is likely to increase in the coming months. The Federal Reserve tightening cycle is ongoing, while monetary policies in Japan, the Eurozone and, to a lesser extent, the UK, remain highly accommodative.
The corporate tax reform has been identified by both the President and Congress as a top priority of the new US administration. Possible features of the planned corporate tax overhaul include:
The global context remains supportive to equities. Despite their slight increase in the Eurozone, risk aversion measures remain at a low level and are supportive of equity market performances. The BofA Merril Lynch Fund Manager survey shows that positions in equities have risen to a 13-month high while allocation to bonds has fallen to a 13-month low.
In terms of asset allocation, risk appears to have switched from equities to bonds, as the prospect of a US recession in the next 12 months has sharply diminished. Furthermore, equities have an attractive relative valuation compared to credit, and their expected return should be boosted by encouraging Q4 earnings results so far. Meanwhile, we continue to monitor the main political events that could create uncertainty and volatility on the equity markets.
We still believe in the possible re-rating of euro-zone equities driven by an attractive valuation, an increase in corporate profits and a positive investor sentiment that is nonetheless less bullish than last month.
However, uncertainty could resurface when the Brexit negotiations start, and the road ahead is paved with political risks galore. This justifies our slight overweight on euro-zone equities, and ongoing negative stance on UK equities:
Relative to the US, Euro equity performance continues to recover some ground.
We have recently increased our position on emerging markets. The USD remains broadly stable and the region appears to be less vulnerable than in the immediate aftermath of the US elections. Also, an outright trade war between China and the US seems less likely for the time being. India remains our preferred emerging market, thanks to:
Since Donald Trump’s election, we have maintained our strong conviction on a longer-term rise in US bond yields. We have further increased our underweight in duration. We continue to favour a short on US Treasuries.
Commodities – boosted by the continued rebound of materials – continued to recover in January, in line with the global cyclical expansion. Copper prices have jumped over the past month, on the back of Chinese inflation growth. Brent crude oil remained more or less flat, around 55 USD/barrel while OPEC members cut production levels in January, towards the 32.5 mbd agreed. However, US rigs have been re-opening, implying a greater production that is likely to weigh on oil prices. Moreover, the panoply of executive actions from Donald Trump on energy issues, such as the Dakota access pipeline, could also put some pressure on oil.
Separately, gold edged higher as the US dollar lost ground in the first month of the year and US interest rates remained more or less stable.
Monthly Strategic Insight
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