Markets Are Paused
Trump has now finished his first 100 days, and if his rhetoric is right then he is the most effective President ever. With more Executive orders signed than any other President, the most announced number of fake news on regular daily cycle (WSJ), and with the Republicans controlling both the Senate and Congress one could think that much of his legislation would be passed in an instant. Unfortunately that has not played that way.
Equity markets are now becoming somewhat dismayed by the lack of detail and policy. For example his much vaunted tax bill was a mere three pages. To repeal a tax code with some 20,000 pages one would expect a little more detail than three pages. That’s exactly why the equity markets are losing hope. His tax bill looks very unlikely to pass any Congressional test and with a hostile opposition it is unlikely that any tax bill that increases the deficit will pass.
On trade Trump is all over the place, first saying he will quit the TPP and NAFTA, then he wants to be part of NAFTA, this is all creating major problems. How does a CEO of say GM or Walmart, Kmart or GE, plan for the future not knowing the future tax policies or whether his goods will be heavily taxed each time those goods cross a border. Better to wait and see. And that appears to be what the broader economy is also doing.
The GDP for first quarter was as expected – lower than first thought. The U.S. economy is running at around 0.7% growth at present the slowest pace of growth for some three years. (Given Trump was quick to claim January numbers as his making, I wonder why he has not been so keen to grasp the GDP growth number for the first quarter). The first quarter usually has a weather effect and this quarter was not different in that respect, although the weather impact was only for a week or so, the rest of the quarter was quite mild by U.S. standards. The animal spirits after awakening early appear to have gone back to sleep.
Bonds are showing true skepticism and are judging the Trump administration as ineffective. Announcements of lower taxes, spending increases would in a normal world send bonds weaker and they were initially weak. However bonds are judging Trump on his policies and what he does. The repeal of the Affordable Health Care Bill (Obama Care) failed despite the Republicans plotting and planning to repeal the Bill for some 5 years. Trump has not been able to bring both sides together after fracturing all those who stood against him. Politics have become decidedly polarized and so too the Nation. What did make the U.S. great was the ability of both sides of politics to work together without electoral fear if they thought the other side had a good idea. It worked for Reagan and so too for Clinton, but appears unlikely for Trump.
Trump is also losing allies in the Murdoch empire. Ailes and O’Reilly have gone and the only true believer is Hannity. The media is now starting to pivot harder against Trump and that will make him even more likely to believe that he is being bullied and make him even more combative. And that won’t be good for good governance or policy.
Equity markets are now rallying for the right reasons. For many corporates their earnings have been reasonable, some exceptional and the equity market is rallying on future expectations. In the meantime rates remain persistently low and that helps valuations. Friday’s GDP number does throw some doubt into whether the Fed can increase rates two more times. If the current economic trend continues then we are likely to see equities rally again based on low interest rates. Bonds would also rally as any future rate hikes would be discounted. The important signal to now watch is inflation. Any chance of inflation falling will create nervousness in the equity markets and bonds should have a strong rebound.
The Friday session saw the Bloomberg Spot Dollar Index fall 0.14%. the euro was up 0.17%. Oil was up 0.43%. Copper was up on concerns of a strike in the copper mines in Indonesia.
The U.S. ten year closed at 2.29% and the German 10 year Bund closed at 0.32%. The U.S. yield curve flattened slightly with the 2/10 closing at 101.40, the 10/30 at66.70 and the 2/30 ‘s at 168.30.
Aussie Market Today.
The U.S. equity market led the Way Friday being slightly stronger and bonds rallied marginally. The expectation will be for slightly stronger markets. The AUD looks vulnerable in a commodity sense, with iron ore falling. A higher copper price could help the resource sector on the day however I don’t see too much assistance.
The Aussie dollar could settle given the expectation of rate rises in the U.S. look a little less likely at the moment. Iron ore continues its plunge and this could weigh on the Aussie dollar causing further falls.