ARIA Capital Management ATP Quarterly: Tax Brake
ASSET ALLOCATION HIGHLIGHTS:
» Global reflation continues. The China PPI was up almost 7% y/y in Sep. Oil prices have been stable-to-rising. The recovery in global nominal GDP has boosted corporate profits around the world.
» Japan is having a good year, and deflation ending which may well be under appreciated.
» Importantly for the U.S. business cycle, there has never been a U.S. economic recession with corporate profits staying buoyant.
» Perhaps importantly, the “Trump Trade” is still ahead of us – to date it’s been about China and Oil, not Trump (yet) to our minds. The ‘tax brake’ is perhaps surprisingly still on.
» Inevitably interest rates are rising, but only slowly the ECB taper in Europe is slow, and Bank of Japan remains ultra-accommodative. China is restricting credit growth but in a very targeted fashion. The US Federal Reserve’s balance sheet is declining but at a glacial pace.
» Inflationary pressures are well contained, but are trending up which is a market positive. Reflation before inflation.
» The US Dollar may strengthen as the December rate hike remains a given, however, could stagnate in the new year at the new Federal Reserve Chair Jay Powell pauses for thought, skipping the March 18 rate rise many expect.
» The 2018 market will need the US tax cuts and reform program to pass to maintain its momentum – market sentiment remains positive on the assumption that these fiscal measures are enacted.
» There are reasons to continue to expect continued capital inflows into the U.S. bidding up the value of the dollar, depressing exports in the process.