U.S. Treasury Official Says Economists Lowballing Tax-Cut Impact
Economists are underestimating how rapidly the U.S. economy will grow from tax cuts that are encouraging companies to invest and create jobs, a senior Treasury official said. “Despite the stock-market volatility, the economy is enjoying a period of relative strength and prosperity in both the United States and in many other countries,” said David Malpass, the Treasury Department’s undersecretary for international affairs, at an event in Washington on Wednesday. “Many forecasting models low-ball the longer-term growth effect of the new tax law by focusing on its fiscal mechanisms rather than the structural change.” The “real growth effect” will come from “businesses, large and small, responding to improvements in growth policies,” he said. The White House’s economic outlook in the 2019 budget proposals released Monday counts on a unlikely mix of faster growth, lower unemployment and tame inflation. The Trump administration sees inflation, based on the consumer price index, averaging 2.1 percent in 2018 and 2.3 percent over the long run, according to the assumptions. The economy is seen expanding 3.1 percent this year and 3.2 percent in 2019, following 2.5 percent in 2017. Analysts surveyed by Bloomberg expect gross domestic product to climb 2.7 percent this year and 2.3 percent next, with inflation at 2.3 percent in 2018 and 2.2 percent in 2019. U.S. financial markets were roiled recently by concerns that inflation is picking up, driven by a tightening labor market, which could lead the Fed to quicken the pace of interest rate increases. Investor worries deepened on Wednesday when January’s inflation data came in faster than expected. A combination of tax cuts and deficit spending backed by Congress is expected to stimulate the economy, adding more pressure on the inflation outlook.
European Stocks Falter After Asia Rally; Oil Rises: Markets Wrap
European shares struggled to carry forward a rally from Japan and the U.S., where the S&P 500 index notched its best week in five years. Oil advanced while the dollar steadied against major peers. The Stoxx Europe 600 index slipped as auto and consumer stocks dropped. That contrasted with Asia, where equities built on their best week since September 2016 as Japanese stocks closed higher while the yen fell. U.S. equity futures rose, German bunds retreated with most European bonds and the euro edged higher. European markets were the center of investor attention on Monday as U.S. stocks and Treasuries take a break for Presidents’ Day holiday and markets in Hong Kong and China remain closed for the Lunar New Year. The continent’s equity gauge has trailed its American counterpart since a global selloff earlier this month, partly thanks to a jump in the euro. As the week rolls on the U.S. Treasury will open the borrowing floodgates, and it’ll be up to bond traders to signal how much that extra supply will cost American taxpayers. The Treasury will pack in auctions totalling $258 billion this week, including record-sized sales of three- and six-month bills. With little in the way of significant economic data on the schedule, the sales will provide the clearest gauge yet of how steeply borrowing costs may rise. In Asia, currency traders saw the yen retreat from a 15-month high even as data showed Japan’s exports and imports grew strongly in January from a year earlier in a sign the economy continues to expand.
As Rate Woes Roil Treasuries, Bond Funds Seek Refuge in Asia
The Treasuries rout is making emerging Asian bonds look even more attractive. Higher yields, buoyant economies, and a slower pace of rate increases in Asia suggest that sovereign debt in the region will outperform Treasuries, said Adam McCabe, head of Asian fixed income at Aberdeen Standard Investments. Indonesian, Chinese and Indian bonds offer value, according to Aberdeen, State Street Global Advisors and Amundi Asset Management. “The fundamentals are still very strong in Asia from an economic perspective, and the adjustment from a policy perspective is larger in the U.S. than it is in Asia,” McCabe said in an interview in Singapore. “Those policies weren’t adopted in Asia, so the room for bond yields to move should be less.” As the Federal Reserve moves to dial back its stimulus and the market starts to consider a quicker pace of interest-rate increases, the 10-year Treasury yield has surged to a four-year high with debate raging over how far and fast it will advance. While Asian central banks are also starting to tighten, the expectation is for a more gradual increase, according to State Street.
Japanese Exports Grow 12% as Trade Recovery Moves Into 2018
Japan’s trade recovery powered into 2018, with exports and imports registering strong growth. The increase in imports resulted in the first monthly trade deficit since May 2017. Japan enjoyed a strong export recovery in 2017 that helped push the nation’s economy to the longest expansion in nearly 30 years. Rising imports, a sign of improving domestic demand, indicate the Bank of Japan is making progress in its efforts to generate a self-sustaining economic recovery. A surging yen, though, is a risk. It will make imports cheaper, weighing on inflation, while cutting into exporters’ profits.