BofAML Global Letter: life after the election

Redacción - Sabado, 29 de Octubre

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Global Letter: life after the election
In this new feature, we comment on the major issue of the week and point readers to key stories. As the US election winds down, focus will shift to post-election policy. We expect continued gridlock, but some policies are doable including infrastructure spending and corporate tax reform.

Global Hot Topic: the globalized Fed
Fed officials have gradually acknowledged the greater role for global spillovers and

feedback effects in the US economic outlook. The Fed has tactically delayed its hiking cycle due to global shocks such as the Chinese devaluation and Brexit. Global factors also are behind the slower pace of Fed policy normalization and lower r* estimates.

United States: the case for a “high pressure economy”
Janet Yellen’s recent comments on a “high pressure economy” are not new, but they are a reminder of another reason to overshoot the inflation target. The weak economy probably did some structural damage; extending the cycle could undo some of that damage. The Fed is slowly figuring out that overshooting its target is the prudent policy for a targeting central bank.

Euro Area: when expectations disappoint
We look once again at the anchoring of inflation expectations and conclude it is bad.

Short term, medium term, and long term inflation forecasts (even those of the ECB) respond much more too current inflation than in the past. Premature exit from stimulus would have severe consequences on the (damaged) credibility of the central bank.

Emerging EMEA: Saudi Arabia: Record external bond

supports outlook

The record US$17.5bn Saudi external debt issuance, the biggest bond sale ever by an EM country, is likely to help ease financing strains, ease domestic liquidity, slow down the drain in Fx reserves and reinforce its ability to support strategic regional states.

Latin America: Mexico: trick or trade?
We expect GDP growth at 1.9% in 2016 and 2.1% in 2017, both below consensus. We

expect inflation at 3.2% by year-end and 3.5% for next year. We expect Banxico to continue hiking to bring the policy rate to 5.5% by end 2017. The government will reach a primary surplus in 2017.

UK: BoE cautious now, more easing next year
Next week’s Inflation Report will likely be a cautious affair. We expect the BoE to raise

inflation and near-term growth forecasts while cutting medium-term growth: a delayed not avoided Brexit hit. We see no change in policy for now, but expect more easing in February.

Australia: “Complicated” AUD keeps easing bias
We expect the RBA to be on hold for an even more extended period as housing market

activity has been stronger than expected. The RBA will maintain an easing bias in order to offset any currency appreciation, complicating the economy's adjustment. We still see the next RBA move as lower as labour market dynamics will see spare capacity persist, weighing on wages growth. 

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