Jay Powell wants stronger residential investment, and that is what he is going to get. The housing market may have reached an inflexion point: construction spending should accelerate in H2. Domestic reflation may pull the stock market higher in the coming weeks. Longer-term, the stock market looks more vulnerable, if the political climate shifts against US corporates (a separate commentary will address this issue on Tuesday).
Ironically, it has been the growth of private non-residential fixed investment (particularly in intellectual property products) – not acknowledged by the FOMC chair – that has underpinned this long economic expansion. Demand from US companies for 7nm chips has been strong over the summer.
Eric Rosengren – who dissented against the latest quarter-percentage point cut in rates – has highlighted the financial stability risks of excessive easing at this stage of the economic cycle. The Boston Fed President expressed concerns over co-working companies on Friday after WeWork postponed its IPO. Investors have become more discerning, scrutinising business models more closely, asking how many other start-ups in the SoftBank portfolio have been mispriced.
Indeed, the latest Flow of Funds report, published by the Federal Reserve last week, included big upward revisions to corporate sector debt coming from higher miscellaneous liabilities. Corporate bond liabilities also remain elevated at 26.7% of GDP, not far off the peak of 27.4% of GDP in Q3 2017. Record corporate bond issuance earlier this month – investment-grade companies in the US raised $72bn across 45 deals in a single week – will push outstanding corporate bond debt back up to the highs of 2017.
