Fed members look concerned by the level of equities. San Francisco Fed President John Williams declared recently that the stock market is “running on fumes” while Janet Yellen said that current stock valuation levels are “rich”. Both declarations have been made at separate moments and it is clear the Fed underpinned stocks overvaluation.
Our overview of the US economy is bearish and markets expect today’s Q1 GDP to be released at 1.2% q/q. We believe that fundamentals are still soft and we consider the US recovery to be overestimated at the moment.
On top of that, the IMF in a report has slashed its GDP forecast for year-end by removing the effect of President Trump’s fiscal stimulus. Indeed, it looks more and more uncertain that this fiscal plan will ever be implemented at this point. The IMF forecast for US GDP is now 2.1% from 2.3% in April. As a result the Trump target of 3% growth looks less and less unattainable.
Currency-wise, there is room for further weakness for the greenback. The Eurodollar pair, which has strengthened out of Draghi’s comments, should continue heading higher on markets pricing back in US economic difficulties.
By Yann Quelenn