What are investors to make of what is happening in the US?
As large US budget deficits raise questions about debt sustainability, fiscal concerns are beginning to affect prices for longer-maturity government bonds and the US dollar.
There are signs though that the country’s equity market could power ahead this year.
Goldman Sachs Research has undertaken some research to try and steer a way through the maze.
Ashok Varadhan, co-head of global banking and markets at Goldman Sachs, said he is “super bullish” on equities, even though they’ve reached all-time highs.
“There’s a tailwind to the US economy from deregulation,” he said, “and it will be important to assess whether the US manages a fair recalibration of trade and continues to attract the best, brightest, and most able people to its labor market.”
“And we’re not even in the first inning of companies implementing AI,” Varadhan added. “Once that company implementation happens you get that productivity dividend.”
Concerns about US budget deficits are beginning to drive up yields on longer-maturity treasuries with Goldman Sachs Research forecasting that the dollar will weaken against other major currencies.
Rob Kaplan, Goldman Sachs vice chairman, noted that while treasuries have long been the world’s haven asset, longer-dated bonds haven’t rallied this year, even as estimates for economic growth have declined.
“So the question is: Is the 10-year and longer duration still the safe haven, flight to quality, asset?” Kaplan says.
Varadhan expects the treasury yield curve to steepen: shorter-term treasury yields are likely to decline relative to longer-dated Treasuries as the Federal Reserve lowers its policy rate. “The question is whether the data warrants easing a little or a lot,” he said.
According to the Goldman Sachs the economic outlook for the US, meanwhile, is on the cautious side, set against a backdrop of tariff increases.
“While the US is expected to avoid a recession, its GDP is forecast to grow by only about 1% this year as tariff rates rise,” said Jan Hatzius, Goldman Sachs’ chief economist.
The risk of recession is around 30%, which is double the historical average.
“On the economy, it’s going to continue to be a slog,” Hatzius added.
While import taxes have had little impact on prices so far, Hatzius expects core inflation to increase by about a percentage point to more than 3% this year.
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