Policy continues to play a key role in financial market activity. Last week, the European Central Bank (ECB) announced a larger than expected monetary stimulus package including 60B in monthly asset purchases. The program is open-ended, extending until inflation expectations reach 2% or at least until September 2016. Actions by the ECB are expected to (1) weaken the Euro as monetary policies diverge; (2) demonstrate the ECB will do whatever it takes to defend the common currency; and (3) boost bank lending. Quantitative easing by the ECB will not be a panacea to Europes problems (lack of structural reform, demographic etc.) but should provide benefits to the regions economy, growth conditions, and financial markets despite pervasive negative sentiment.
While the environment in Washington is arguably as toxic as ever, both President Obama and Congress have incentives for cooperation before the 2016 elections and are not far apart on several issues. This opens the door for some potential positive surprises in 2015 that may surround:
Corporate Tax Reform: U.S. corporate tax rates are the highest in the industrialized world at 35% and there is interest on both sides of the isle to push rates lower.
Trade Policy: The Republican Congress is likely to grant the President fast track trade authority. This would make it easier for the President to pass trade agreements, including the Trans Pacific Partnership (TPP). The TPP is a trade agreement being negotiated between 11 countries in the Asia-Pacific region and would be a key part of President Obamas foreign policy pivot toward Asia.
Energy Policy: The collapse in energy prices could create a window of opportunity for action on several energy-related issues, including a relaxation of the crude export ban.
Fiscal Spending: Rising government revenue on the back of stronger economic growth will make it easier for the government to tolerate higher spending.
Actions by the ECB and potential policy developments are pro-growth in nature, supporting our expectations for solid economic growth conditions in 2015, a continued advance in the U.S. dollar, and a gradual normalization of short-term interest rates by the Federal Reserve.