Global Economic Perspective: November

Uncertainty Ahead of Trump Administration but Fundamentals Remain Constructive

Following the outcome of the US elections, the longer-term implications for fixed income markets are still unclear. Given the uncertainty around a Trump presidency, volatility may remain elevated for some time until the way forward becomes more apparent. But to us the fundamentals for the US economy continue to be constructive, underpinned by the backdrop of strength in the labor market and demand from consumers. Though the policies of the new administration may influence some sectors more than others in 2017 and beyond, we believe the passage of the election and the economy’s current solid, if somewhat sluggish, expansion should in turn give the Fed enough confidence to further tighten monetary policy, albeit at a very measured pace.

The Fed had been widely expected to refrain from making any changes to monetary policy at its November meeting, given the meeting’s proximity to the US presidential election, and these expectations proved correct. However, the central bank tweaked the language in its accompanying statement to indicate an increase in benchmark interest rates was moving closer, and in doing so bolstered existing forecasts that a hike at its next meeting in December was the most likely next step. For much of October, US Treasury yields rose and the Treasury yield curve steepened, though this move tracked a trend seen across government bond markets globally, which was largely caused by speculation other leading central banks might rein in their quantitative easing programs at some point in 2017.

The Fed’s stance reflected the solid economic data seen since its last meeting, most notably third-quarter gross domestic product (GDP) figures, which underlined the steady overall performance of the US economy since the middle of the year. While the higher-than-expected annualized growth of 2.9% was the fastest rate in two years, the headline number masked some significant swings within its more volatile underlying components, particularly a surge in exports that was largely due to unusually strong overseas demand for soybeans. Inventories, which had been a drag on growth, also made a positive contribution, as did government spending, but conversely consumer spending, the main driver of the economy in previous quarters, slowed from its elevated second-quarter pace of 4.3% annualized growth to a more sedate 2.1% increase.