US: Punchy growth conditions - Westpac

According to Richard Franulovich, Research Analyst at Westpac, the recent back up in US yields has done little to help arrest the exceptionally supportive trend in overall US financial conditions.

Key Quotes

“The weaker USD, persistent tightening in credit spreads and near daily record highs for equities have been more than compensating positives, nudging financial conditions yet further in the direction of accommodation.”

“Back in September 2017 we noted that taken at face value the easing in US financial conditions pointed to an acceleration in US growth toward 3%+. As of late January the persistent easing in US financial conditions has been such that even faster growth than that is on the cards in 2018. The major caveat is that GDP growth has struggled to match the pace implied financial conditions for much of the post-crisis era.”

“Simple simulations of our financial conditions index for the US shows that US10yr yields would need to rise 50bp from current levels to fully offset the easing in financial conditions delivered so far this year by the 2.7% fall in the broad USD TWI, the 6.7% increase in equities and the 30bp narrowing in Baa corporate credit spreads.”

“Elsewhere, almost all the US regional PMIs for January 2018 have been released and the CAPEX detail continues to impress too. If anything the 2016Q2 low point for the regional PMI CAPEX plans and the subsequent bounce seems to be following the trend in global growth and global PMIs, both of which bottomed in 2016Q2. Regardless of the precise trigger though, the signal for business investment is a punchy one.”

“The bottom line is that both financial conditions and soft surveys are very punchy for growth.”