CIO & Head, Global Fixed Income, Currency & Commodities
5 REALISTIC Surprise Predictions for 2017
Posted on December 22, 2016
The Federal Reserve raises rates 6 times in 2017 OK – I really think that the Fed will hike every other meeting and raise rates four times to 1 ½% – 1 ¾%. But if I’m wrong, I think it’s because they do more, not less. As the U.S. economy continues to gather momentum and inflation starts to tick above 2% on a y-o-y basis, they must surely feel uncomfortable with a real Fed funds rate that is so negative. In fact, six increases next year will only bring them to about a zero real Fed funds rate (2 – 2 ¼%) which is still very accommodative. The trick for them is how to get there. I think we have already seen their intent with the migration higher in the dot plot. The market can easily absorb March and June rate hikes…and they can use the meetings from March to June to prepare the market for hikes in each of the last four meetings in 2017. By the second quarter, we will likely have corporate tax cuts in place and plans for a fiscal spend will be in their final stages…so there will be plenty for the Fed to lean into with a bit more force. If I were on the Fed, I’d want to get to 2% sooner than later, and then pause before beginning the march to a neutral rate of 3 ½% – 4%.
Oil hits $75 The oil market has had a rollercoaster ride over the last couple of years, falling from over $100 to about $25 before settling around $50. However, during that period, the supply-demand imbalance has been corrected with rig counts falling, shale production declining and no meaningful new investment going into the energy sector. Additionally, demand started to pick up globally, but especially in the emerging markets. Throw on top of that a combination of OPEC and non-OPEC production cuts, and suddenly the potential for a backwardated curve looks very real.
The Euro rises 15% versus the USD I got a lot right on last year’s list, but this is one that missed in a big way! It was all going so well for the Euro in 2016 until Brexit broke it down and Trump-o-nomics trampled it. It is true that Brexit has yet to be triggered, so we don’t really know what its impact will be. And, a Trump administration ought to lead to a more vibrant U.S. economy. But, the Euro has already undergone a large adjustment which can be seen in European corporate earnings. While Fed tightening could provide a nice tailwind for the USD, we believe watching the ECB is more critical. From just over par, the EURUSD has more upside on further ECB tapering than it has downside from more Fed tightening.
Emerging Market Debt is the best performing fixed income sector EMD has been hit by a combination of factors: 1) a Trump presidency reeks of protectionism, 2) Central banks are beginning to dial down their level of accommodation and 3) China looked shaky for most of the year. But we must appreciate that EM country fundamentals have improved since the taper-tantrum and the market has cheapened quite a bit. Stronger U.S. growth should be very positive for emerging markets as it leads to a spillover in the global supply chain…as long as a Trump administration is more balanced and less protectionist. This is really the key to the emerging markets, and so far President-elect Trump has surprised us with more balance than his pre-election rhetoric. Quite simply, if he stays the course with this moderate approach, then external EMD credit spreads should zip in and currency gains should propel local market returns much higher. Emerging market debt and currencies have just gotten too cheap.
10 year U.S. Treasury yield hits 3 ½% The 5% probability that Trump would win the presidency AND the Republicans would sweep Congress AND a Trump administration would seek compromise has now become everyone’s central scenario. The policy stimulus tailwinds that are forming make the unconventional tools deployed by central banks look outdated and the market levels of bonds look silly. I think it is clear to every elected official that they have until the mid-term elections to create higher paying jobs in a more broadly vibrant economy. Too many investors are trying to defend the bond buying that has occurred since the financial crisis and the way they are invested, as opposed to repositioning for the reflationary future. The money-in-motion has yet to occur in earnest, and it doesn’t bode well for bond yields.
NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional/wholesale/professional clients and qualified investors only as defined by local laws and regulations.
The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in India by JPMorgan Asset Management India Private Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited, or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd; in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc.
Copyright 2017 JPMorgan Chase & Co. All rights reserved.