Is it time to reset market view? Maybe. All we know is that Trump is moving quickly into election mode and what we saw as erratic behaviour may simply become the norm. Over the weekend we have had the usual threats on trade, and these range from raising tariffs on Mexican goods because they are not doing enough to stop the odd few who come to the U.S. border as illegal immigrants. (A significant number of research reports have been completed on this topic and it appears as though Trump is using the wrong data or is choosing to play up to his supporter base.)
Either way, markets are now set for a period of volatility should they wish to follow every comment Trump makes. Trade is most definitely being affected and with it, markets. But so too by comments being made by Trump. For the moment Trump wants full credit for the economic performance. This plays to Trump’s supporter base but it also raises questions relating to the growth rate which is one of the slowest despite a large rate cut, interest rates at near or at record lows and inflation subdued.
The environment for growth has probably never been better. Trump’s people believe they can grow the economy at 3% whereas none of the 17 policy makers at the Fed believe the growth rate will be faster than 2.2% next year. Meanwhile the deficit, yes remember the deficit, just keeps on ballooning as tax receipts fall. And yes,Trump has warned that should he not be re-elected then the stock market is in for an epic fall.
This week we have the FOMC meeting. The bond market is betting on a rate cut and so too the equity market. It may be that the Fed feels that it is being bullied into a cut by markets and chooses not to cut. Jeffrey Gundlach of DoubleLine Capital certainly feels that the Fed won’t cut rates.
The equity markets ended the week a little weaker. Broadcom fell 5.6% after warning that demand for chips is slowing. The S&P 500 has gained around 4.9% in June and should the Fed not cut the stock market is primed for a fall. For the Sinophiles, Chinese industrial output growth in May slowed and is showing signs of falling further on weak demand. Output growth for May was 5% market forecasts were in the range of 5.4%.
One bright spot for the U.S. economy was retail sales. Retail sales was up 0.3% for April rather than the previously reported down 0.2%. Exports, slowed and home sales fell in April.
The yield curve continued to flatten Friday amid subdued investor fears of rapid economic decline in the second quarter. The slightly stronger data is making some bond investors hesitant and are adopting a wait and see approach before buying anymore bonds. A view now is that the Fed will suggest that they are open to a rate cut or two but at this point won’t ease further.
Others are not so sure and some believe that the data is showing the way for Powell to ease and that with the escalation of the trade war with China points to slower growth and a need to ease.
For Powell though his biggest concern may be his number 1 critic, the President. It appears that if Trump is re-elected then Powell will most likely go, and the criticism continues with Trump providing another broadside on Friday. The great fear is that Powell has no political capital left and the polarisation of politics within the GOP is making his job even more difficult. The issue will be what happens at the next recession as the Fed has few options as it has used most of its bullets. Interest rate cuts become almost meaningless, what do they do next?
Are rates destined to continue to fall? That looks to be the case if one looks at some of the economic reports being produced. JP Morgan in their recent review have interest rates on average sub 2.5%. Leading the charge in cuts are Russia, India, Chile and Australia who are amongst a number, loosening interest rates.
Amongst the reasons being provided are a savings glut, an aging population that does not wish to borrow and low inflation.
The question now becomes, with rates so low how will central bankers rescue economies and how far will the rate cuts fall?
Equities: The S&P 500 fell 0.16%. The Dow fell 0.04%. The Vix closed at 15.28. The Stoxx Europe 600 Index fell 0.4%.
Currencies: The Bloomberg Dollar Index gained 0.4%, and the yen slipped 0.2%
Bonds: (as at 4.30pm). The ten-year is trading at 2.084%. The 2-year is trading at 1.845% and the 30-year is at 2.588%. The U.S. curve closed on the day with the following closes 2/10 at 23.7 bp, 2/30 at 74.2 bp and the 10/30 closed at 50.3 bp. The U.S. 5-year closed at 1.836%. The 2/5 spread is now -1.1 bp. The ten-year bund closed at -0.256% and the British gilt closed at 0.846%. The 10-year yen gilt is trading -0.13%.
Commodities: Crude rose 0.5% Gold fell 0.1%.
Bitcoin is trading around $9,000.
Aussie Market Today.
Stocks are likely to be mixed on the day. A small rally could be squeezed out of the market. Watch for trade headlines as these have the ability to turn markets.
Aussie bonds probably will pause for the moment, with maybe a small rally. Credit looks well bid, especially so in the shorter maturities. The credit indices were better bid overnight.
As we approach the G20 meeting news relating to trade will be influential in market movements.
Geopolitical risks remain high and still need to be monitored.