Perception winning out over data
The most recent economic data releases in the U.S. have been encouraging although inflation remains stubbornly absent from the economy and is perplexing FOMC members. The dollar continues to gyrate driven by a considerable number of factors.
However, the perception that President Trump is going to be unable, for a variety of reasons, to deliver even an outline of an economic stimulus package this year continues to hurt the currency.
Despite two rate hikes this year following one late last year, initially believed to be in a pre-emptive response to Trump’s plans for the economy and fiscal reform the dollar languishes close to its lows having fallen by 10% this year. A vicious circle is developing where rates cannot be hiked due to uncertainty and uncertainty over rate hikes is pressuring the dollar.
Much as in the U.K. a winter of discontent is brewing in the U.S. as the President becomes more and more isolated as his original team leave his side one by one.
Over his first few weeks in office the President complained about how the strength of the dollar was badly affecting U.S. export performance. He even threatened to label Germany a currency manipulator. He has got his wish for a weaker dollar but there hasn’t been the accompanying rise in exports that such a move should have generated.
Brexit the only game in U.K
Nothing else matters. The market is transfixed by Brexit and the devastating effect it is going to have on the U.K. economy. In the words of Mark Twain (slightly paraphrased), reports of the U.K.’s demise are greatly exaggerated.
As in the U.S. it is perception although maybe more based in fact, that is driving the economy. Sentiment and activity indices are suffering as business investment falls. This is pushing wages lower although the weak pound is sucking in visitors to the country leading to an improvement in the balance of payments, so it’s an ill wind that blows nobody any good!
The main protagonists in the Brexit debate are hardening their positions. Michel Barnier has the complete support of Brussels. Why? Because he is doing their bidding and they all “sing from the same hymn sheet”. It is a slightly different story in the U.K. Several ministers were “remainers” in the first place and seem determined to undermine any move towards a “hard” Brexit which is leading to a “mish mash” of policies and suggestions. This brings a leadership contest in the Ruling Conservative Party ever closer.
Labour day approaches as activity picks up
In the market’s consciousness, there is only one week of summer to go. Next Monday is Labor Day in the U.S. accompanied by holidays in many centres. This is the traditional end of summer and the market can be expected to start to pick up in both activity and volatility.
The major themes for the rest of the year are already well established. Brexit and Trump will dominate. There is an election in Germany next month but it would be the blackest of black swan events were Angela Merkel not be returned for a fourth term.
One item not being widely reported yet is the fate of Fed Chair, Janet Yellen. It is unclear although generally accepted that she will seek re-election but it is far from clear if President Trump wishes to retain her services.
If he decides on a change, Gary Cohn a former COO of Goldman Sachs is her likely replacement according to Wall Street. There is likely to be more heard on this matter as the fourth quarter progresses. The President only nominates his choice(s) the ratification is done by Congress.
