November Ends With a Bright Economic Outlook
As November ends, the message from the financial markets is clear, the outlook for the US economy looks brighter across the board.
Very few predicted these developments, but I did, which speak to the enormous fluidity that has taken over markets and politics and that signals the end of the “New Normal.”
This could lead to 2 contrasting outcomes depending on how politicians respond in the months ahead
The strong rally in stocks and the USD, plus rise in yields on government bonds, demonstrate that markets have embraced the likelihood of higher growth and higher inflation for the US. There can be not growth without inflation.
With that action the US is now different from other advanced economies, many of which are facing significant growth slowdowns, and institutional uncertainties.
As a result, US stocks have outperformed EU ones.
At the same time, the rise in US interest rates, which produced the worst month for the bond market since Y 2009, has broken a longstanding trading band for the differential between the benchmark 10-year Treasury yields and German Bunds of the same maturity.
This happened in the wake of 2 major developments deemed unlikely only a month ago
- Donald Trump winning the US Presidential election and
- Its reading by the financial markets as a “risk-on” event.
It has also helped that relations between the President Elect and the GOP establishment that now holds majority in both houses of Congress have softened.
The 1st development demonstrates how today’s politics enable anti-establishment movements and empower them to upend traditional political assumptions and defy expert opinion.
The 2nd speaks to the markets’ yearning for a pro-growth re-balancing of a policy mix that has relied on central banks for too long.
They show what happens to sophisticated democratic economies that are stuck in a prolonged period of low and insufficiently inclusive growth as we saw during the past 8 years of the Barack Hussein Obama Administration.
Remember, Bill Gross’ The New Normal, aka “low but stable growth accompanied by central banks both able and willing to repress financial volatility” has been undermined by a number of political, financial, social, economic and institutional factors.
Frustrated citizens in the US have told its political system to change. And politicians who respond by signaling their intention to implement pro-growth measures, just as President Elect Trump is doing now. And that action has been rewarded with better financial market sentiment and by an increased flow of corporate cash into investments on plant, equipment and people.
These November messages must be heard and headed by political classes in the US and EU.