US: How much further can expectations rise? – Westpac

According to analysts at Westpac, the potential for another fresh bullish re-profiling of US growth and Fed expectations is arguably limited.

Key Quotes

“Tax cuts/fiscal stimulus and accommodative financial conditions have already fueled a significant uplift in Fed /private sector growth expectations for 2018, from the “low 2s” to around 2.7-2.8%. Admittedly a meaningful positive fiscal impulse continues to wash over the US economy in 2019.”

“Both the CBO and the IMF project an implied fiscal impulse in 2019 of 0.6% of GDP, not that dissimilar to 2018 (see below). But against that, the relentless easing in US financial conditions has come to an end and Fed Funds is approaching neutral.”

“US financial conditions are not tight but choppy equities, wider credit spreads, higher mortgage rates, yield curve flattening, a stronger USD and wider LIBOR-OIS wholesale funding rates have all finally produced a clear turning point in various measures of US financial conditions.”

“All told, growth expectations are unlikely to turn lower, if at all, but the trend of persistent upward revisions has probably crested. Matching that, the prospect of an even more hawkish Fed in the next several months does not seem likely – there’s next to no chance the Fed will signal five hikes in 2018 and they will not be compelled to raise expectations for 2019, if needed, until well into next year.”