Analysts at HSBC suggest that in the US, the financial stability risks are not pressing as house prices have just recovered to their pre-crisis peaks, but, given the household sector deleveraging that has been undertaken since the crisis, the alarm bells are not ringing yet. 

Key Quotes

“Equity and credit markets in the US and Europe do seem to have reached valuations that are not obviously consistent with the underlying performance of the economy. This may be sustainable as long as interest rates remain low and the income gains of the current expansion continue to accrue primarily to the owners of capital, as reflected in the still high profit share in GDP for this stage of the expansion. In terms of risks to current asset return expectations, lower growth, higher rates, or anything that alters the way the pie is being shared – such as an acceleration in wage growth not backed by higher productivity or changes in government policy relating to taxation, regulation, labour laws or even protectionism – could lead to a reassessment. Asset price deflation would follow.”

“Irrespective of our growing concerns that the current exuberance poses risks to long-term macroeconomic stability, we do not expect actual full-blown changes to monetary frameworks to come through over the next couple of years, even if there is a more nuanced interpretation of the inflation targets. Central banks will hope that the existing regimes and established credibility will allow them to gradually normalise policy and maintain macroeconomic stability over the long term.”

“Hence our view remains that ongoing disappointment on inflation and productivity growth should probably mean that while the FOMC will continue to allow a very gradual shrinkage of its balance sheet, it will not be raising its Fed Funds rates beyond 1H 2018. Our strategists’ view is that this implies no resurgence in the USD and a generally friendly backdrop for emerging market financial conditions.”