Monday Musings: January 4, 2021

Jan 04, 2021

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Public Trust Credit Team
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Major players release their 2021 outlooks, giving investors rosy thoughts to ponder

The major banks and investment firms have released their 2021 investment outlooks and provided investors with plenty to ponder. Below is our recap of the top themes:
 
Economic Growth
Most strategists believe that 2021 will start off rocky due to surging COVID-19 outbreaks around the world and the discovery of a new, more contagious strain. However, multiple vaccines have been approved and distribution has begun so there is plenty of pent-up demand from consumers to kick start a recovery. Many banks are calling for a shift from goods to services and from public spending to private spending which bodes well. Globally, risks appear to be concentrated on the upside with economists looking for near 4% GDP growth in the U.S. and 5.2% for global growth in 2021.
 
Monetary/Fiscal Policy
On the monetary policy front, strategists believe that global central banks have used most of their ammunition and do not have many tools left to intervene. Most expect balance sheet expansion at the Fed to the tune of $5 trillion in 2021 but no hikes until at least 2024, in line with comments from the Fed. We expect this to lead to a more normalized period of Fed operations, similar to post-financial crisis times, with the Fed sitting on the sidelines to wait and see. As the recent U.S. stimulus has shown, fiscal policy remains uncertain, but global government spending is likely to remain elevated as economies recover.
 
Inflation
Most strategists expect muted inflation in the near term with certain risks. Strong economic recovery coupled with large government spending could lead to an environment where inflation accelerates faster than predicted, but soft fundamentals elsewhere in the economy have led most economists to believe a strong surge in inflation is unlikely and that real rates could remain negative. Many economists believe global economic growth has moved 2-3% below its pre-COVID-19 trendline, leading to a permanent loss of output that could keep inflation mostly muted.
 
Yields
2021 appears to be the year of steepening due to a variety of factors. Treasury issuance is expected to focus on the middle-to-long-end of the curve which should boost yields when coupled with growth expectations. The short-end of the curve should remain tight and near-zero as demand remains strong. Finding value in investment-grade credit may prove challenging as the asset class comes off of a strong year and spreads remain within the non-recessionary band of 90 – 130 bps.

The Markit U.S. Manufacturing PMI data reported 57.1 this morning versus the Bloomberg survey of 56.3 for December 2020

Today’s report marks an improvement over the prior month’s reported 56.5 and remains in growth territory (>50). The ISM Manufacturing PMI reports tomorrow with November 2020 figures at 57.5 and the current survey for December at 56.7; the ISM New Orders also reports tomorrow. Figures reported at 50 or greater dictate expansion for the index while under 50 implies economic contraction. The initial jobless claims report on Thursday will be closely watched to see if restrictive COVID-19 measures during the holiday season have a material carryover into the jobs report. The current Bloomberg survey shows initial jobless claims at 803k, an increase from the last report of 787k, signaling the U.S. economy could be regressing due to elevated COVID-19 cases over the recent months. Though vaccinations are well underway in the U.S. and many developed nations, the need for additional measured fiscal and monetary response is not anticipated to go away anytime soon.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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