March 2017

• As in February, robust data continues to support the global synchronized economic recovery. A rise in global trade is taking hold (in volume terms, it just reached a 7-year high), with PMI / manufacturing activity above trend. So is consumer confidence, lifting animal spirits. This said, the rise of global populism and the policy uncertainty it entails means that “fat” tail risks abound. For reasons we expand below, we believe that negative tail risks events are likely in the US while positive tail-risk events are more likely in the Eurozone. The fate of emerging markets (EM) much depends on what will happen in the US and China.

• The global benchmark 10-y US Treasury bonds currently yield 2.5%. With US core inflation now rising at a 2.8% annual rate and 5-y inflation expectations of a similar magnitude, they should be at 4%+. Structural deflationary pressures (ageing, tech) and sustained demand for USD assets explain this pressure on yields, but unless interest rates return gradually to “more” normal levels, they could spark a violent shock.

• We haven’t found anybody able to explain to us how Trump’s first budget blueprint has the capacity to buck the declining trend in US growth rates. Following a short cyclical upswing (if at all), it would leave the economy stagnating at 1+% yearly growth. The rolling back of decades of social democracy combined with the “deconstruction of the administrative state” advocated by Bannon would devastate the most vulnerable communities, sapping the country’s lifeblood. The budget blueprint will never be accepted in its current form but it is indicative of Trump’s modus operandi. After the health care legislation debacle, investors may start doubting the reality of tax reform and infrastructure investment. Soon, the market will give up on the Trump reflation trade. . .

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