Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm here today in London at the Morningstar Investment Conference to talk to JP Morgan's, Karen Ward.
Hello, Karen.
Karen Ward: Good Morning.
Wall: So, I've just listened your presentation. I thought we could focus on the U.S. There was a very interesting slide that showed, sort of, the disassociation between growth in the U.S. and the amount of spending that is about to be done.
Ward: Yes. Exactly. So, the U.S. administrations announced not only an enormous government spending package, but obviously this is great big tax reform and that's going to push the budget deficit towards around 5.5% over the next two years, but I think what's complicating the issue for market as well as this sounds great that's more growth.
We have never seen a fiscal stimulus of this size at a time when the economy is already doing very well. When unemployment is already low. So, it raises so many interesting questions. How is this going to prolong the U.S. economic cycle?
It might mean that actually it gives us another couple of years of very strong growth if we see productivity come back, if we see that participation rate in the labor market continue to rise and that will actually come through in addition to growth, which is obviously great news for markets.
At the same time, there is a risk that it turns up in inflation, and of course, what that means then is whilst the U.S. administrations are giving with one hand in fiscal stimulus, the Federal Reserve will be taking away with the other hand in higher interest rates. So, that's where the markets are bit schizophrenic about how to interpret this additional stimulus.
Wall: You said the key Fridays to be watching where are the job figures because you've already seen it this time. This year, we saw the jobs figures be better than expected and the whole word wanting to note that for few days. Didn't it?
Ward: Exactly. We saw wage growth pick up one month to 2.9%, just a 0.3 percentage point increase, pretty modest, still low by historical standards, but at the same time, the U.S. 10-year rose 30 basis points, the equity market was down 10%.
So, this sensitivity to higher interest rates, what that means for stocks is absolutely acute. We're just going to be watching that payroll's number each Friday to see what extent wage growth is actually coming back and as I say whether this stimulus is showing up in growth, good, or showing up in inflation, not so good.
Wall: Why do you think it caused such volatility because you have mentioned the U.S. reaction, but it wasn't U.S. centric. Now, I am based in Hong Kong, the Asia markets fell considerably, European markets fell considerably. We know that this is an unnaturally low bond environment and yet the idea of bond yields rising is still quite shocking.
Ward: You are right. There is this, I think, a gut feeling in many investors' minds that when the central banks were pumping money in, markets went up. So, therefore, if the central banks are taking money out, markets will go down and they, sort of calling, get over that idea that that's the relationship. We've got to remember that the raise in the central banks were operating so aggressively is the natural spirits in the economy were non-existent.
Companies, households were not willing to spend, and they were being forced to through low interest rates. So, for me, an environment where those animal spirits coming back, where households and businesses want to spend, fine, we don't need low interest rates. The economies and therefore earnings and therefore the stock market should do perfectly well in that environment.
Wall: Karen, thank you very much.
Ward: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
