Global markets are in a transition phase – BBH

Analysts at BBH agree with the consensus that the markets are in a transition phase and the consensus sees this transition phase as a new economic convergence.  

Key Quotes

“European and Japanese economic growth continues above trend.  Large emerging markets, including BRICs, are also expanding. Central banks are gradually moving away from the extreme accommodation.”  

“We recognize the robust economic growth, but we do not see this economic convergence has yet to produce a shift in policy.  Our argument is stronger yet.  Peak divergence still lies ahead.  This divergence has two components: central bank balance sheets and policy rates.  Not to put too fine a point on it, but the Fed's balance sheet is going to begin shrinking, while the ECB and BOJ balance sheets are going to continue to expand.  Like it did earlier this year ahead of the March rate hike, the Fed's leadership has again taken the market by its hand and convinced it a rate hike in December is likely despite the undershoot of measured inflation.  The ECB seems several quarters away from raising rates, and the BOJ longer still.”  

“Still, a transition is taking place.  The agenda is changing. Investors know that eurozone growth appears stable at above trend levels.  This creates an asymmetrical risk with the September PMI that will be reported in the week ahead.  Strong readings will confirm what we already know; disappointing data will surprise.”