What is the key investment message overnight? At the start of the year I said that in 2013 the US economy was still in intensive care, but this year will see it go back to the ward and in 2015 it will be back to full health. Well after years of strong medicine, some known and some experimental, it appears that the balance sheet adjustment is well advanced and the patient is going home earlier than expected. I have written many times, that the two missing pieces to the US recovery this year are increases in business investment and wages growth and until those arose the recovery would not be sustainable. Last month’s employment report may represent the first credible signs of the latter falling into place with wages growth up +0.4% in a single month. However, does this pull forward a US Fed rate hike? The bulls say yes, because the central bank will not make the same mistake of lifting rates too late when the recovery was evident, and the bears say no because the non-labour market data remains patchy. For what it’s worth, in relation to their rationale I think they are both right and they are also both wrong. Wages growth may not spark earlier action from the US Fed as there are a lot of disinflationary forces at work in the US economy for the next six months including lower gas prices, lower import prices and a stronger US dollar and until the PCE (the Feds preferred inflation gauge) is trending towards the +2% target rate, the US central bank will remain idle. Having said that I now feel more nervous about my September 2015 rate hike call – it could be too late as at present rates, the US labour market will run out of spare capacity within 12 months. However, more water needs to go under the bridge before I think the US Fed will be worried about repeating historic mistakes. Having said that, I am sure questions will start to be asked, and investors will need to start determining whether this would alter their asset allocation. I still favour Japanese and European equities over the US on a valuation basis, but dont think US treasuries can remain at 2.31% if inflation is rising, growth is strengthening and the US Fed is hiking. Regards, Matt Sherwood Head of Investment Markets Research
Posted on: Mon, 08 Dec 2014 00:31:50 +0000
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