"Nothing is more obstinate than a fashionable consensus"
- Margaret Thatcher
Happy New Year.
In our final note of 2020, having reflected on the December FOMC statement and of course Chair Powell’s press conference, we outlined what has become the near complete consensus view: Firstly, that 2021 will see an enhanced recovery / reflation trend through successful vaccine rollout generating a high reopening delta from a relatively low base. Secondly, that US nominal yields will continue higher as the economy rebounds, led by inflation expectations, thus keeping US real yields suppressed and driving a lower USD. Lastly, by extension, that this low real yield base and global post-Covid reopening will drive a rotation out of growth stocks (particularly tech that has benefitted from the lockdown) and into value (predominantly old economy) stocks, inside and outside the US. Among analysts, there is some variation on the primary drivers of valuation, or the currencies or global equity markets that would benefit most from this consensus macroeconomic projection - but surprisingly no dissent.
Three weeks later, the day after the minutes of the December FOMC were released, there have been some interesting developments for the US and for the global economy, but consensus is unaltered. Plus ça change, plus c’est la meme chose.
As is often the case with a consensus view, particularly when things have generally moved in the expected direction and there is a marked-to-market event (in this case the start of a new year), 2021 has begun with a wobble of uncertainty. Against this backdrop it is perhaps worth considering whether events have brought any real change to the macro outlook.
- Last night’s release of the December FOMC minutes continued to highlight a Fed that is intent on maintaining monetary accommodation for the medium term - only one additional member joined the ‘dots’ of those expecting a rate hike in 2023 and “all participants judged that it would be appropriate to continue those purchases at least at the current pace [$120B per month] ... until there is substantial further progress” towards its dual mandate of price stability and full employment.
- Further, building on the positive economic narrative surrounding vaccine breakthrough from the minutes, there has been further positive vaccine related news (both in the US and globally), despite some supply issues, with more vaccines likely authorised and coming ‘on-line’ soon.
- Lastly, the Georgia elections have resulted in a de-facto (though limited) Democratic Senate majority, which is likely to generate a further fiscal stimulus. This implied fiscal expansion (expected to be in the region of 600-750B or a further 3+% GDP) was deemed as both stimulative and reflationary by financial markets. The fact that it is likely to consist to around $300B in stimulus checks/cheques suggests a fast fiscal transmission or economic boost.
So essentially, we would argue that the events over the past three weeks have strengthened the consensus arguments. The growth argument is perhaps clearest. The reaffirmation of loose monetary policy (adding to the huge tailwind from lower rates in the US), further fiscal stimulus and higher vaccine expectations all contribute - and the net positive wealth effects of higher equity and house prices remain clear. From our perspective this continues to argue for higher US equity markets, and while we fail to see a strong case for the rotation out of either (tech) growth into (old economy) value or indeed out of the (faster growing) US into (lower trend growth rate) global economies, equities are likely a rising sea that should lift most, if not all boats.
The arguments for a weaker USD are likely also reaffirmed by recent events, as the Fed appear resolute in driving real rates lower to stimulate demand (and inflation) and notably, the shift towards a more fiscally profligate US administration and a higher support for policies that potentially nudge (alarmingly) towards those of MMT.
That is not to say that I have forgotten about the statement upon which I ended 2020 - suggesting (to paraphrase Chair Powell) that I was thinking about thinking about buying USD. There is a conflict within the consensus that is potentially difficult to square in that, higher US rates, higher equities and a lower USD are only likely compatible in a world where the US is not significantly outperforming. In the near term, it is likely that the recovery pace of many global economies flatters the sustainable or trend growth rate over subsequent periods. However, at some point, potentially relatively soon, we expect the US to widen its growth differential advantage over the rest of G10 (and similarly China over the rest of EM - though that is another story) and against that backdrop - against those currencies where perhaps vaccine rollout is weaker, and or pre-existing conditions or constraints return - the USD can buck the trend.
Ultimately therefore, we continue to view the main themes as unchanged - despite the wobble of conviction as we enter 2021. However, as the year progresses, it is unlikely that the dominant FX narrative remains a uniform ‘sell the USD’. Differentiation will return - in some instances potentially quite soon.
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