The main event this past week was the Fed meeting, which clarified the Fed’s view on the stronger USD and softer data. It became clear from the meeting that the recent uncertainty has led the Fed to signal a later lift-off than June. In the Fed’s view it is better to risk a too late lift-off than a too early one. It can always raise rates a little faster if it comes too late but if it hikes prematurely and would have to undo it, it would mean loss of credibility. As highlighted by Janet Yellen, this is not a new view and one of the reasons why rates have been on hold for six years now. However, it has been unclear just how much the Fed believed uncertainty had gone up and whether it was enough to delay a rate hike further. Following the Fed statement and lowering of rate projections, we now know that the rise in uncertainty was enough to push the hike further into the future and we have moved our call for the first hike to September from June, see FOMC update: We push the first rate hike from June to September, 19 March 2015.
So, the Fed will keep the punch bowl a while longer and stock markets reacted with relief. On top of that, we expect the US stock market to benefit from a re-acceleration in growth following the recent slowdown. The surprise index has reached very negative levels but as growth bottoms we expect it to climb higher again, which should give support to the stock market alongside the more dovish Fed expectations.
Euro stocks have significantly outperformed the US so far this year (in local currency) and in the medium term we continue to recommend overweight of Europe versus US. Growth is accelerating, Europe is much behind in the overall business cycle with a still very big output gap, and monetary policy is very accommodative whereas the Fed will eventually tighten. In the short term, though, we might see a pause in the outperformance as price momentum is quite stretched in the euro area – both on its own and versus the US.
To Read the Entire Report Please Click on the pdf File Below