Research Team at Goldman Sachs, maintains the view that a normalization
of policy that is primarily growth driven poses little risk to credit
spreads, but history suggests fund flows do not fare well during hiking
cycles.
Key Quotes
“Cumulative flows (as a percentage of AUM) fell an average of 8% in the 50 weeks following each of the initial liftoff dates in past hiking cycles (1994 and 2004). History might repeat itself in the coming hiking cycle, but we remain of the view that oil prices, not outflows or hikes, are the top risk to spreads.”
“In her remarks, Chair Yellen noted that labor market conditions have bolstered her confidence in the inflation outlook. On growth, Yellen struck an upbeat tone expecting a “moderate pace” over the next several years, driven by domestic spending, a modest positive contribution from government spending, and a lessening of the drag from the energy sector and net trade. On inflation, Yellen noted that the drag from lower import and commodity prices should diminish next year, while tighter labor and product markets should provide some upward pressure. Yellen did not put any new emphasis on a shallow pace of normalization following liftoff, which our US economists view as a mildly hawkish signal relative to expectations.”
“November’s above-trend job gains should firm the case for a liftoff at the December 15-16 meeting. It should also alleviate concerns about downside risks to growth following the slowdown in industrial activity, tightening of financial conditions, and prospective rate hikes by the Fed. We continue to view current spreads as too wide given the reality of US macro fundamentals.”
Key Quotes
“Cumulative flows (as a percentage of AUM) fell an average of 8% in the 50 weeks following each of the initial liftoff dates in past hiking cycles (1994 and 2004). History might repeat itself in the coming hiking cycle, but we remain of the view that oil prices, not outflows or hikes, are the top risk to spreads.”
“In her remarks, Chair Yellen noted that labor market conditions have bolstered her confidence in the inflation outlook. On growth, Yellen struck an upbeat tone expecting a “moderate pace” over the next several years, driven by domestic spending, a modest positive contribution from government spending, and a lessening of the drag from the energy sector and net trade. On inflation, Yellen noted that the drag from lower import and commodity prices should diminish next year, while tighter labor and product markets should provide some upward pressure. Yellen did not put any new emphasis on a shallow pace of normalization following liftoff, which our US economists view as a mildly hawkish signal relative to expectations.”
“November’s above-trend job gains should firm the case for a liftoff at the December 15-16 meeting. It should also alleviate concerns about downside risks to growth following the slowdown in industrial activity, tightening of financial conditions, and prospective rate hikes by the Fed. We continue to view current spreads as too wide given the reality of US macro fundamentals.”
