global perspectives

has the US peaked?

has the US peaked?
Salman Ahmed, PhD - Chief Investment Strategist

Salman Ahmed, PhD

Chief Investment Strategist
Charles St-Arnaud - Senior Investment Strategist

Charles St-Arnaud

Senior Investment Strategist

It is clear that the fiscal stimulus had a big impact on US growth and was responsible for the economic outperformance in 2018, but this positive boost to the economy is now expected to fade gradually in 2019.

Specifically, it is likely that the positive impact of the fiscal stimulus on both consumer spending and business investment will weaken in the coming quarters. Indeed, when we look at capital goods orders, there are already signs that business investment may be weakening. Similarly, the continued rise in interest rates is also causing a slowdown in the housing sector, likely creating a small headwind to growth next year. As such, our view for US growth in 2019 is close to consensus, but we believe that the risks are skewed to the downside.

In addition to the usual drivers of the positive economic growth impact as a result of the strong fiscal easing, share buybacks have been a strong technical factor in US equity markets. Any slowdown on this front starting early next year would represent an important new dynamic in the new year. 

Specifically, the strong repatriation of foreign earnings is estimated to have reached about USD 400 billion by end of Q3 and supported business investment in the first half of the year. It has also boosted share buybacks, which are estimated to have reached USD 680 billion in the first half of 2018, representing the strongest two quarters of buybacks on record. 

For financial markets, the question remains how markets will react to a normalisation in earnings growth, and to a reduction in the amount of share buybacks in coming quarters, as the repatriation of foreign earnings slows meaningfully. This is likely to mean an end to outperformance of the US equity market – a dominant trend of 2018. 

When it comes to monetary policy, we believe the Federal Reserve will continue to tighten gradually. It has already signaled in its latest projections that it intends to hike rates by about 100 basis points (bps) between now and the end of 2019 and reduce the size of its balance sheet by USD 50 billion per month. We think that US ten year yields will peak around 3.30% in 2019, and the flattening of the curve will remain a big issue, going forward.

Given the continued increase in inflationary pressures, the Federal Reserve will need to continue to reduce the amount of policy stimulus. However, our expectation is that the Federal Reserve will hike rates by 75bp between now and the end of 2019 and keep the pace of balance sheet reduction unchanged. The Fed may raise rates less than is currently expected and/or slow the pace of its balance sheet reduction, given the distortions it is creating in the market. Already, recent commentary from key Fed officials, including Chairman Powell, shows increased sensitivity to rising headwinds facing the US economy and suggests a change in tone compared to the hawkish rhetoric which was being used in August. 

The dollar is also likely to give back some of the outperformance seen in 2018, as growth moderates and the rate differential narrows. A weaker dollar could provide a tailwind for global growth and certain assets. It would help improve the external debt position of EM economies and increase the attractiveness of local assets to foreigner buyers, while making assets denominated in dollars less attractive. A weaker dollar has historically been positive to global growth. A recent National Bureau of Economic Research paper estimates that a 1% depreciation in the dollar against all currencies leads to an increase of 0.6%-0.8% in the volume of global trade. 

Download the Global Outlook 2019.

important information.


This communication was prepared by Lombard Odier Asset Management (Europe) Limited. The information contained in this communication does not take into account any individual’s specific circumstances, objectives or needs and does not constitute research or that any investment strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal investment advice to any investor. This communication is not intended to substitute any professional advice on investment in financial products. Investors should take care to assess the suitability of such investment to his/her particular risk profile and circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. The information and analysis contained herein are based on sources considered reliable. Lombard Odier makes its best efforts to ensure the timeliness, accuracy, and completeness of the information contained in this communication. 
Nevertheless, all information and opinions, as well as the prices, market valuations and calculations indicated herein, may change without notice. Source of the figures: Unless otherwise stated, figures are prepared by Lombard Odier Asset Management (Europe) Limited. The tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice and it is up to each investor to consult with its own tax advisors. 
European Union Members: This communication has been approved for issue by Lombard Odier (Europe) S.A. The entity is a credit institution authorized and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg. Lombard Odier (Europe) S.A. branches are operating in the following territories: France: Lombard Odier (Europe). S.A. Succursale en France, a credit institution under limited supervision in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers(AMF) in respect of its investment services activities; Spain: Lombard Odier (Europe) S.A. Sucursal en España, Lombard Odier Gestión (España) S.G.I.I.C., S.A.U., credit institutions under limited supervision in Spain by the Banco de España and the Comisión Nacional del Mercado de Valores (CNMV). 
United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States or given to any US person. 
This communication may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier. 
© 2018 Lombard Odier Investment Managers – all rights reserved