It will surprise none of you to hear that President Trump is central to the simplistic suggestion encapsulated by this headline.
In a nutshell, the White House has failed in its first attempt to navigate the viper’s nest that is the Republican-controlled Congress. The repeal and replacement of the Affordable Care Act, or ‘Obamacare’, did not go well. The right-wingers formerly known as the Tea Party (and now mystifyingly rebranded as the Freedom Caucus) were not satisfied with the scale of the entitlement spending reduction proposed by Trump’s Obamacare substitute – the American Health Care Act (AHCA).
But in order to satisfy these hardline deficit hawks, the AHCA would have required amendments which would render this replacement legislation incapable of providing medical insurance to those most in need. This made it unpopular with Democrats and moderate Republicans. As things stood, it was not going to get the necessary votes in Congress (and would have had no chance in the Senate). Accordingly, it was withdrawn.
The withdrawal was immediately leapt upon by much of the media as evidence of Trump’s incompetence and House Speaker Paul Ryan’s incompetence. It provided material evidence, they claimed, that Trump was a fish out of water, unable to pass a single line of his proposed legislation. Given these very same people have been the ones telling us that the only reason 10-year Treasury yields are as high as 2.5% is that the market expects gigantic fiscal stimulus, the ‘obvious’ conclusion to draw was that equities were a screaming sell and bonds were a screaming buy. This logic is flawed.
It is not just because of expected fiscal stimulus that US Treasuries are higher than a year or six months ago. While we did see equities fall and US Treasuries rallying the magnitude of the moves was fairly unimpressive. Over March as a whole, the S&P 500 was almost exactly flat. Bonds followed a similar path; while 10-year yields moved from 2.35% to 2.62% during March, they closed the month at 2.4%. This is hardly a convincing unwind of The Great Trump Reflation Trade of 2017.
The rise in yields since the middle of 2016 represents a confluence of factors: rising inflation, improving cyclical recoveries in the Eurozone and, not least, the massive stimulus thrust into the system over in China. Be careful on that front, though, because the Chinese are slowly tightening monetary policy. The chances of a misstep are a clear and present danger. If China tightens fiscal policy too, we could feel those ripples as they make their way across the financial system and, ultimately, the global economy.
For the time being, I am still bullish on the global economy. The most powerful dynamic here is the self-fuelling, synchronised and thoroughly virtuous global economic recovery. Having dragged each other down after 2008, economies are now dragging each other up as higher growth, higher inflation, and – most importantly of all – improving confidence drive pro-cyclical behaviour. In such an environment, Federal Reserve interest rate hikes act as confirmation of a better world. Trump only needs to achieve a small portion of what he has promised on the economic policy front for the results to be significant.
March’s European Central Bank press conference was going swimmingly, with President Draghi skilfully avoiding any difficult questions, until near the end when he seemed to acknowledge that actually there were all sorts of conversations going on behind the scenes – including whether they could or should change the forward guidance or hike rates.
A few ECB Governing Council members subsequently got their hawkish views out there and thus we saw rising yields, including in those bonds with short maturities attached to them. The euro rallied as investors viewed the market like one headed for a policy normalisation. This too is likely to pass. Draghi couldn’t allow all this normalisation talk, so cue a raft of doves backtracking.
And last but not least: the UK Prime Minister May signed and despatched The Letter that officially notified Brussels of its intention to withdraw from the European Union.
To the surprise of some, data continues to suggest that the economy is ok. Inflation is increasing, but as yet that hasn’t stopped the UK consumer in his or her tracks. In part, this is down to the UK consumer being a hardy breed. I also subscribe to a theory that consumers have options. They don’t need to sit idly by and accept food inflation. Aldi and Lidl, the two German uber-discounters, are rapidly gaining market share. Given that they are roughly 20% cheaper than their rivals and yet continually win awards for the quality of their food, this feels like a pretty attractive and rational option. Unfortunately, macroeconomics doesn’t allow for consumer preference behaviour so this is likely to be ignored.
I may be wrong but I’m still pretty sanguine about the UK’s economic prospects. However, most other market players and observers aren’t sanguine. They are still hysterical. So Gilts continue to perform far too well and in spite of the lack of evidence of a material slowdown, sterling remains in a tight trading range.
We did get one vote for a rate hike at the Bank of England’s March meeting, but Kristin Forbes is leaving soon anyway. So hopes for any rate rise may need to be placed on hold indefinitely.
The Phantom Ranter
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