US Treasury yields and the US dollar fluctuated around renewed focus on tax reform, potential for hawkish central bank leadership and ongoing strength in economic activity data. The US Federal Reserve (Fed) kept policy unchanged but described the growth outlook as "solid" for the first time since January 2015. We expect a rate hike in December and we are underweight US rates.
The European Central Bank (ECB) announced it will reduce monthly asset purchases from €60bn to €30bn for nine months from January. European credit markets are expected to receive an elongated technical tailwind as the central bank "will continue buying sizeable quantities of corporate bonds", with reduced purchases being centered on sovereign bonds.
US tax reform gathered momentum with further details released around each proposal, but uncertainty remains around timing and execution of proposed changes. Measures will impact investment grade and high yield markets, as well as sectors, to varying degrees and we see scope for offsetting impacts. Although tax reform may serve as a cash flow tailwind and the macro environment remains supportive, we are cautious in our exposure to corporate credit at this late stage of the cycle due to extended valuations.
Deceleration in activity indicators has been a key theme in markets in recent weeks. In the US, we do not think any dip in macro momentum will lead to the near-term-change in the US Federal Reserves’s (Fed) reaction function and we continue to expect three further rate hikes this year.