Working Through (11 December)

Paul Krake

Working through

it may just be me, but it doesn’t really feel like the holidays are having an effect on the investor mindset. While the content of your inbox is littered with the musings and predictions for the 2018 outlook, I get the sense that many are business as usual. Holiday parties appear to be toned down and there is little talk of vacation days. Sentiment just doesn’t feel rosy despite 2017 being one of the most extraordinary for wealth creation in history (and not just for you bitcoin aficionados).

I am not going to get into a discussion on which investor types have underperformed in 2017. I am just going to say that there is still quite a bit of news flow to digest over the course of the next couple of weeks. Some of which will have an influence on the outlook for assets in 2018 but most will add to the intrigued of how much further can risky assets run between now and the end of the year. After an amazing year for long only investors, can we add a couple of extra presents under the tree?

The Federal Reserve will raise rates this week. We will get dot plots and a press conference but given this will be the last by Mrs. Yellen, does this actually matter? Frankly, I don’t think it does because we will have many new dot plot authors in 2018, so while the trajectory of cash rates is up, the extent of the moves under a Jerome Powell Fed remain less clear. Is he Janet Yellen 2.0? That’s my base case, but nuances matter regarding the Fed, so there is little we can learn from the aftermath of yet another December interest rate increase.

When is the last time you had a discussion about tapering by the Europeans? Mr. Draghi and the ECB meet on Thursday, with Bund yields remaining capped and QE in full swing. Again, the nuances matter, but ECB slowing its rate of bond purchases is not a focus, making it the number one risk to long duration bonds and global equities this week. US and European banks continue to see inflows as rotation out of technology still has momentum. Bunds back through 40bps would see Chinese and Japanese banks play catch up.

Washington is front and center. The final version of the tax plan is currently being haggled over. Something will get done despite some negative headlines. The focus for companies is whether tax cuts commence in 2018 (House plan) or 2019 (Senate plan). This directly affects bottom line forecasts for SPX earnings, so this will drive beta. As for the government shutdown, who knows, but despite terrible optics, does it really matter that the world’s largest organization can’t pass a budget? Historically, the answer is no. The Alabama Senate race on Tuesday will be the headline grabber because a Republican loss equals a tenuous two seat majority for the Senate, which makes passing future legislation that much more difficult. Tax legislation won’t be affected either way.

Inflation trends are vital for 2018 returns. We will be swamped with commentary about the absence of global wage inflation despite numerous developed economies at, or close to full employment. US wages clearly showed this on Friday, and US PPI and CPI this week will be watched carefully for signs of any emerging threats. UK CPI matters for GBP that has run out of good news in the near term, outside of a surprise level of hawkishness from the BOE meeting

Apart from the Fed, BOE and ECB, the Swiss and Norwegian central banks meet. On Tuesday, Japan PPI and Indian IP. On Thursday, Australian Employment data, Japanese IP and PMIs for the EU, Germany, Japan and the US.

Paul Krake

Founder, View from the Peak

IND-X Advisors Limited

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