Market focus: Trumponomics

Financial markets - and in turn investors - will focus on the actions and executive orders of President Trump and his new team in coming weeks. The markets took note of his comments, as President Elect, when he said the dollar was overvalued. His Treasury Secretary, Steven Munchen, has reiterated what is normally stated as the official US policy stance: that a strong dollar remains centre stage. Perhaps this one instance is indicative of what we can now expect: with greater volatility as markets over-react or take their lead from off-the-cuff comments from the President.

That being said, The Oval Office will attract attention as the new policy agenda begins. The markets have given the new President the benefit of the doubt: expecting policies and super bills that are both business and domestic economy friendly. This includes fiscal measures, such as increased infrastructure spending, tax cuts and smaller government. There will be lots more besides, including super bills. Since winning the election, the dollar is firmer, inflationary expectations higher, longer term yields are off their lows and equities are stronger. Given the current mood of the markets the attention may remain focused on the good news in coming weeks.

Trump: The New Reagan?

But there are challenges. For instance, analogies with President Reagan are understandable, but the policy environment is different to 1980's, as debt levels are already high and monetary policy already loose. Also his fiscal boost may be constrained by Congress but even if his fiscal plans do materialise might monetary policy need to be tighter than the markets are already assuming? Markets have also not factored in possible negative effects including those linked to trade tensions or his handling of geopolitical risks.

All this links into some of the key events of the last weeks, which are all worthy of attention.

IMF raises economic forecasts for 2018

Last Monday for instance, the International Monetary Fund (IMF) released its latest update on the world economy. The IMF left unchanged its global growth forecast for 2017 and raised it for 2018.

In each of the last seven years, global growth forecasts (official and private sector) have been revised down. Last year global growth was 3.1%, the weakest since 2008/09. But after a difficult first half to 2016 (highlighted by financial turmoil and worries about China) there was stronger global growth in the second half. Indeed recent economic data across the globe has been strong, indicative of the reflation that appears to be underway. This year the IMF is predicting 3.4% global growth, rising to 3.6% next. The economic data in recent weeks has been positive, across a host of countries. Such reflation is also seeing higher inflation, albeit from low levels.

Mark Carney: Why interest rates will stay low

And in this context, it is worth noting the speech, also last Monday, from Bank of England Governor Mark Carney. Speaking at the London School of Economics, he basically gave the background for why interest rates will stay low this year, despite a rise in inflation.

He titled his talk, "Lambda". Not the most catchy title, perhaps, but lambda, as the Governor showed, is the symbol used to denote, "the relative weight the policymaker places on output stabilisation, relative to inflation stabilisation". In fact the Governor was trying to explain the trade offs in monetary policy, between inflation, the performance of the economy and the financial sector. The message for now was a reiteration of the existing stance that the Bank will tolerate a rise in inflation over the coming year. That rise, as he has highlighted previously, is expected to be temporary.  That remains to be seen. As other data over the last week showed, the labour market is strong and wages are creeping higher. Data in the UK, as in the US, points to resilient growth.

Brexit and Davos

We have already commented elsewhere on these Our Views pages on last Tuesday's speech by the Prime Minister at Lancaster House, outlining the Government's Brexit strategy. It was a strong message, but here too, as in the US, one should expect market volatility. The Supreme Court judgement, for a start, on Article 50 is due in a few weeks.

Then, the final take away from the last week were the messages from Brexit. Prime Minister May followed up her speech in London with an equally clear one in Davos, where she focussed on making Britain's global agenda work. It was a positive message. Also giving a relatively positive message in Davos was the Chinese President. While he did warn about the risks of protectionism he also gave a clear message that China intends to play a greater global role. To do that, he of course needs to try and ensure strong domestic growth, which was the message of his new year speech a few weeks ago.

And that perhaps is the message for investors. Whatever their global agenda, one important underpinning of the plans of President Trump, Prime Minster May and President Xi is their need to deliver on solid domestic growth. If they do, the reaction that has been seen recently in global economic data and financial market performance will continue. If so, then the IMF, and others, may start to revise their forecasts higher, and central banks too may have to reconsider their near-term policy stances. It may be this, and not just the change in the US President, that the markets need to focus their attention on in coming months.

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