Global Outlook

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Global Outlook
•   Our projection for faster nominal GDP growth is consistent with nearly 10% global corporate profit growth in 2017.  Disinflation and a material tumble in productivity growth have depressed corporate profits and business spending since the global financial crisis. We expect disinflationary drags to fade and project 5.4% nominal global GDP growth next year, roughly 1%-pt faster than the average pace since mid-2014. From a 1.5% low, global CPI inflation should rise to 2.4% in 2017.

•   Donald Trump’s surprise election victory should be viewed as a new global shock, mixing positive demand and negative supply elements. There remains considerable uncertainty about the actual mix of policies to be enacted, but the bias of risk reinforces the tilt toward reflation.
•   For the US economy, we expect 2.1% GDP growth in 2017; a tightening labor market should bring core PCE inflation back to 2.0%. Risks around the fiscal policy outlook are much greater than usual, and trade policy is a wildcard.  After a widely-anticipated hike in December, we look for two more tightenings from the Fed this year.

•   The anticipated 4.2% pace of EM growth is still below our downgraded estimate of potential and 2%-pts below the average for the previous expansion.

•   J.P. Morgan’s trade-weighted USD index is now at a 14-year high and can rise another 2% if Trump’s policies validate the 2017 Fed dots, and 5% cumulative if the 2018 dots start to look realistic.

•   Oil markets look set to tighten further in the coming quarters as better than expected compliance from OPEC ensures drawdowns in oil inventories. We continue to expect prompt prices to rally over the first half of the year and Brent could average $62/bbl during 3q’17 if price tailwinds persist.  However, the decisions taken by producers in 2016 now look set to forestall a price recovery in 2018. The supply rebound in 2h’17 keeps pace with forecast demand growth. Consequently we retain a 2017 Brent price forecast of $58.25/bbl and introduce a 2018 price forecast of $60/bbl. WTI prices are $2/bbl below this at $56.25/bbl and $58/bbl for 2017 and 2018 respectively.

•   The backdrop is likely to remain bearish for Treasuries and duration in 2017. We expect the Fed to tighten twice, although the chance of getting three rate hikes in 2017 has increased. Other DM central bank policy will be less accommodative in 2017, with the fiscal balance to deteriorate further. We expect 10-year Treasury yields to rise to 2.85% by year-end 2017.

•   Equities have a window of opportunity to perform over the next quarters, as the initial benefits of reflation are priced in. This calls for the continuation of rotation away from Growth and towards Value. Banks remain one of our main global OWs. The Eurozone is typically a big beneficiary of a rotation into Value. The concern is the heavy election calendar, but valuations look attractive and sentiment/positioning is already negative, and we stay OW. We are OW Japan as it is helped by weaker JPY and the region looks attractively priced.  We are UW UK as Brexit fallout is yet to come through.
•   We expect S&P 500 to reach 2,400 by year-end 2017, largely driven by positive base effects from commodity linked sectors and normalization of the US and global business cycles. Prospects of expansionary fiscal policies under a relatively easy monetary backdrop are likely to help support further re-rating of the US equity multiple. Our EPS target of $128 is mostly policy neutral, as it does not incorporate proposed changes from the new US administration.

•   We are constructive on US corporate credit as we expect higher rates to make the asset class a more attractive investment for domestic and international investors. Expectation for decreased regulation, positive tax reform, increased fiscal spending, and less congressional gridlock could produce the most favorable backdrop for corporate earnings in years. The prospect of less bond supply, brought about by the removal of the corporate interest expense tax deduction and the repatriation of overseas cash, is supportive for spreads. In the US high yield market, defaults are expected to remain low amid an improved fundamental backdrop for commodity credits.

*Reflects views as of January 30, 2017


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