Bond Market Observations: Jingle, Jingle, Jingle

Holly was already strewn about the breakroom by the time the Investment Committee met, but that was not the source of the relative good cheer. Across advanced economies, recent data on activity has been upbeat, consumers come across as confident, and meaningful fiscal impetus seems in motion in the US and, perhaps, elsewhere. Central bankers share the good feelings, in that Fed officials and ECB staff upgraded their outlooks for real growth (as had BOJ policymakers a few months ago). While the direct economic impetus of corporate-tilting tax cuts in the US is limited, it adds to the impetus from ongoing deregulation and lowers the chance that the White House resorts to activity-crimping executive actions with a legislative achievement in the bag.

Considerable uncertainties attend how President Xi will use the power he successfully consolidated at the recent Chinese Communist Party conference. Our guess is to expect more of the same, slow and measured reform and a tapering of the use of leverage that implies a modest easing of growth. Continued Chinese expansion puts a floor on commodity prices and fosters the growth of other emerging market economies.

Around the world, inflation seems hard to come by, and we think that the major economies will not hit their inflation goals by the end of next year. The Fed gets closest as measured by their preferred PCE price index and overshoots with CPI inflation. Still, policy renormalization is ongoing and, judging by the reaction to the FOMC’s quarter-point hike on December 13th, is getting good press. The Fed may be in front, but the ECB will make news in 2018 with moves on its balance-sheet program. The BOJ, while hewing to its yield cap, will look for opportunities to slow the expansion of its balance sheet.

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