All the major countries are getting more growth and more inflation than anyone predicted last fall. The US had already built some momentum, but analysts were still fretting about a return to recession as recently as last September. It was not until the Fed hike in December that the word “recession” got taken off the table. In Europe, analysts remain torn between evidence of growth and inflation, and the conventional fall-back position of “euro-sclerosis.” Even Japan is getting some good data at last, like today’s PMI, more a function of the weaker yen than a function of rising global demand, but rising orders books cannot be overlooked.
This afternoon we get the Fed minutes from the Dec 13-14 policy meeting. Judging from Yellen’s comments about “operating under a cloud of uncertainty,” at the press conference, the Fed does not share the markets’ assumption that we are about to get a new era of higher fiscal spending, tax reform and other Trumpian pro-growth measures. Yellen said some members had penciled in more fiscal spending, but it’s not a core Fed assumption. We do not expect the minutes to disclose any alternative scenarios if fiscal stimulus does come about. The Fed doesn’t speculate, especially after getting it so wrong in 2016 (four hikes expected, one late one delivered).
The WSJ highlights that while the balance of risks to the outlook were “roughly balanced” at the Dec meeting, the minutes should disclose exactly which risks the Fed is watching. We might say that rising oil prices, rising dollar and rising long yields are “tightening” in their own right. Does this delay the next hike? Maybe.
We have yet to see the market seize on rising eurozone inflation as a precursor to tapering, but just wait. It’s coming. Draghi has gone to some lengths to deny tapering is on the table—policy members didn’t even talk about it at the last meeting—but surely ECB economists are beavering away in the back room to come up with inflation forecasts that are linked to oil rising from the $55 area to $60-65, probably the max. Expectation of the ECB pulling in its horns nurtures pro-euro sentiment regardless of what the Fed is doing. SocGen says tapering won’t be an issue until the second half. We say this forecast is not consistent with what we know about the timing of expectations. The ECB may have the second half in mind, but markets adore predicting far ahead of time.
Now that we have a New Factor in play, how does it shape up in real life, aka the bond market? The two -year differential, the measure traders like when big changes might be afoot, is 1.2300% for the US minus -0.781% for Germany, or 2.011% in favor of the US. BBH’s Chandler says the 2-year diff peaked last week near 2.06% but was below 2% last week. The path toward a widening differential just got a lot rockier. The diff is not the only determinant, but it counts.
And now the FT introduces a possible new factor from the Trump gang—ultra-long Treasuries. Like nearly all of Trump’s ideas, this one lacks shape and substance, but some of Trump’s financial sector guys, including TreasSec Mnuchin and possible CEA leader Kudlow, agree with Trump that the government should take advantage of current conditions and issue 50 or 100-year bonds. Many in the market are appalled. It has something that works and is the world’s benchmark—don’t mess with it. But when Mnuchin mentioned 50-year and 100-year issues, “The 30-year Treasury yield rose by 12 basis points to 3.06 per cent on November 30, after Mr Mnuchin made his comments.”
The US famously seeks to avoid surprising the market. Floaters (2014) and TIPS (1997) took years to introduce. Trump doesn’t have that kind of caution or patience. To be fair, the Treasury is fuddyduddy. We have no evidence the market is not more adaptive these days. Together with a trade war of some stripe, or rather many stripes, ultra-long issuance is the one Trump idea that we see as real and pending. Trade will probably come first, now that Trade Rep Lighthizer has been named. Mexico and China are in the cross-hairs. See the peso chart. The dollar/MXN is nearing the strongest level since the election.
It’s hard to say, but Trump can get away with a lot of things in a rip-roaring world economy that he couldn’t get away with in a recession. Today HSBC was the first, or one of the first, to upgrade its forecast of global growth and inflation. The good new manufacturing data everywhere, a resilient China and the mythical fiscal boost in the US all point toward the first forecast upgrade in five years. Global growth will be 2.5% (from 2.3% forecast in Sept) and rising to 2.6% in 2018. Inflation will be 3% (from 2.7%).
By country, the US will get 2.7% this year (from the old forecast of 2.2%). Recall that late last week, Morgan Stanley had 1.6%. The UK will keep beating the gloomsters and get 1.2% (from 0.7% in the old forecast) and even Japan will get 1.2% (from 0.9%). The Reuters story doesn’t give the eurozone forecast.
If HSBC is right, the “reflation trade” could have a long way to go. And evaluation of Trumpian policies has to be seen in a different light. We may be about to get the creative part of Schumpeter’s “creative destruction.” This is not necessarily dollar-positive, but it’s not inherently negative, either.
Trump may be unprincipled, but already showing strong “leadership,” if that’s the right word. After the House made its first order of business the dismantling of the independent ethics office, Trump tweeted that the House has its priorities wrong and they have better things to do. The press and the public also protested, but Trump’s chiding is probably the reason the House reversed itself.
In another incident, Trump complained that Ford was shipping Cruze autos from Mexico back into the US and should be paying a border tax. Trump has his facts wrong, as he so often does. The Cruze made in Mexico goes mainly to non-US destinations and Ford issued that correction within an hour of the Trump tweet. But a little later, Ford announced it is scrapping plans to build a 1.6 billion plant in Mexico and will build it in the US instead. So, bad process but desired outcome.
The press is having a hard time with what to name Trump’s misstatements. Are they outright lies, meaning Trump knows the statements are not true? Are they “falsehoods” and what’s the difference? We say Truth matters and carelessness with the facts is a dangerous thing.
NYT op-ed writer Brooks has a dandy piece on the president who isn’t there. [Trump] “is a creature of the parts of TV and media where display is an end in itself. He is not really interested in power; his entire life has been about winning attention and status to build the Trump image for low-class prestige. The posture is the product.
“When Trump issues a statement, it may look superficially like a policy statement, but it’s usually just a symbolic assault in some dominance-submission male rivalry game. It’s trash-talking against a rival, Barack Obama, or a media critic like CNN. Trump may be bashing Obama on Russia or the Mideast, but it’s not because he has implementable policies in those realms. The primary thing is bashing enemies.
“He is … postmodern. He does not operate by an if-then logic. His mode is not decision, implementation, consequence… His statements should probably be treated less like policy declarations and more like Snapchat. They exist to win attention at the moment, but then they disappear.
“If this is all true, it could be that the governing Trump will be a White House holograph. When it comes to the substance of actual governance, it could be that President Trump is the man who isn’t there…. The crucial question of the Trump administration could be: Who will fill the void left by a leader who is all facade?”
Through direct recklessness or inadvertently by letting others else run the show, Trump is going to cause a massive screw-up in 2017. But “screw-up” can have positive effects. The American voter hired Trump to shake things up, and shake he will.
By Barbara Rockefeller
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