There are a number of events and economic reports in the week ahead that will help shape the investment climate in the weeks and months ahead. In recognition of the importance of initial conditions, let’s briefly summarize the performance of the dollar and main asset markets.
After recovering from a five-month decline in September and October, the dollar has lost ground against all the major currencies here in November, save the Australian dollar. Benchmark 10-year bond yields are at the lower end of the ranges since over the last several months. The US two-year yield has risen, and the curve has flattened.In Europe, the 10-year yields have fallen more than 2-year yields, which has also resulted in curve flattening. US, Asia, and Emerging Market equities are near record or multi-year highs. European shares have underperformed in November after rallying in September and October.
United States
• Taxes: The Senate bill is currently expected to be brought to the floor on November 30. We expect it to come down to the wire but suspect the risk is that there are at least three Republican Senators of the 52 that will vote against the bill. It would not end the effort, any more than a similar defeat meant the Affordable Care Act is safe. Although the disappointment could spur a knee-jerk reaction, the medium-term implications may be constructive. If it does pass, we suspect it would provide fodder for the equity market and could spur a steepening of the yield curve.
• Powell Confirmation Hearings: The hearings will begin November 28. Investors think they have Powell’s measure. Mild-mannered, clear speaking, a gradualist who has never registered an official dissent on the FOMC. With extensive turnover at the Federal Reserve,there will be many proposals for a “new beginning,” but look for Powell to represent a strong element of continuity. Changes in communication, and perhaps a press conference after every meeting, as the ECB and BOJ already do, would not be surprising. Little market reaction to his testimony means that Powell did a good job.
