US: Trump card - BNPP

Research Team at BNP Paribas has substantially revised up their US growth forecasts to 2.4% in 2017 and to 2.9% for 2018 on the basis of the administration playing its Trump card – significant fiscal stimulus, with this biting from late 2017. 

Key Quotes

“With the economy already at full employment, unemployment rates are likely to undershoot the NAIRU, putting upward pressure on wages and therefore on prices, especially core services. We see an overshoot of the Fed’s 2% target.”

“After a virtually nailed-on December rate hike, we see two Fed 25bp rate hikes in 2017 and four in 2018; more will likely come in 2019. This will power the USD higher – to parity with the EUR at end-2017 and to 128 against the JPY at the same date.”

“We expect a more aggressive Fed than is priced. Nonetheless, real rates as measured by headline CPI should remain negative in 2018, meaning continued curve steepness. We forecast the 10yr bond at 3.0% at end-2017, 40bp above forwards.”

“Mr Trump may not get as much of his fiscal plan through Congress as expected. We have assumed no major trade wars, but, if wrong, inflation would be higher and growth lower. Inflation’s response to strong demand is an upside risk to rates and the dollar.”