global perspectives
has the US peaked?
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.
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