US: The danger of the consensus view – Danske Bank

Thomas Harr, Global Head of FICC Research at Danske Bank, notes that since the Donald Trump US presidential election victory, a strong consensus has formed that the USD will strengthen substantially and that US rates will head a lot higher.

Key Quotes

“The story goes that Trump-led fiscal stimulus will drive a higher US neutral rate and a stronger USD – much like during the first Ronald Reagan administration in 1981-84.”

“Near term, we agree – rising US growth expectations will drive a stronger USD and higher global rates. The US economy was already gaining speed before the Trump victory. Over the past few weeks, euro area October retail sales, Germany factory orders and China PMI Manufacturing have all surprised substantially on the upside, suggesting that the US-led recovery is spreading to Europe. However, for us, the view of a stronger USD is a short-term one and there is a high risk that the push higher in global yields will lose steam.”

“For a start, there is a lot of uncertainty about the type of US fiscal stimulus and how quickly it will filter through to the economy. For example, the infrastructure spending that Trump has been advocating will not be financed by the federal government but rather by a ‘deficit-neutral system of infrastructure credits’. There is no guarantee that Congress will agree to the tax credits or that business will respond as intended. In addition, Trump’s tax cuts will tend to benefit the ‘better off’, who have a lower propensity to consume and hence a lower fiscal multiplier. Finally, the output gap in the US is largely closed, which suggests that fiscal stimulus will be more inflationary than growth boosting and there may be a negative growth impact beyond a year.”