“Trump reflation” may already be priced out

Despite political risk factors in the US and elsewhere on the worldwide stage, market confidence in the global economic outlook is maintaining the upper hand for now.

Investor confidence in the global growth outlook and in continued accommodative monetary policy is keeping markets resilient in the face of persistent political risks. The environment is ideal for corporates, whose healthy balance sheets and favorable earnings outlooks may mean higher dividend pay-outs. On currency markets, room for further US dollar weakness looks limited.

The political disorder in the US may indeed have reduced the likelihood of “Trump reflation” further, but in our view, little or no Trump reflation was priced in any more. If one looks at forecasts for 2018 US GDP growth, one sees that the consensus forecast jumped by 0.2 percentage point after the US election to 2.3%. Since then, the forecast has stayed at this number. This might suggest that not much Trump reflation has been priced out.

However, economic data this year have surprised to the upside in the US and in many other countries, and forecasts for 2018 GDP growth have gone up by about 0.2 percentage point for many countries this year. So it seems that the stable 2018 GDP growth forecast for the US is the result of pricing out Trump reflation and pricing in better US economic data.

To summarize, we are not convinced that soft US inflation data and political uncertainty will push the US dollar lower going forward. In our view, these two developments are largely priced in by now. In fact, looking at our preferred rate spread, the 10-year real rate, it seems that EUR/USD has overshot already, a view supported by the extended short USD positions. Notwithstanding possible “bandwagon” effects of markets embracing the theme of US dollar weakness, room for further US dollar weakness looks limited.

Jaco Rouw – Senior Portfolio manager, Global Fixed Income – NN Investment Partners