The CIO office’s view of the week ahead.After recent criticism of the Fed from Donald Trump’s top economic advisor, Larry Kudlow, last week the US president himself said that he was “not happy” about the Fed’s rate-hiking campaign. Traditionally, US presidents have refrained from commenting on Fed decisions as a way of affirming the central bank’s independence, but these apparently casual remarks increase the suspicion that the political heat on the US central bank is being cranked up.And yet it is hard to understand the president’s unhappiness. As Fed chairman Jerome Powell reiterated last week, the US economy is roaring along. The job market is very strong, yet inflation remains under control. In short, the US remains in a ‘Goldilocks’ scenario. GDP growth probably topped 4% in Q2,
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The CIO office’s view of the week ahead.
After recent criticism of the Fed from Donald Trump’s top economic advisor, Larry Kudlow, last week the US president himself said that he was “not happy” about the Fed’s rate-hiking campaign. Traditionally, US presidents have refrained from commenting on Fed decisions as a way of affirming the central bank’s independence, but these apparently casual remarks increase the suspicion that the political heat on the US central bank is being cranked up.
And yet it is hard to understand the president’s unhappiness. As Fed chairman Jerome Powell reiterated last week, the US economy is roaring along. The job market is very strong, yet inflation remains under control. In short, the US remains in a ‘Goldilocks’ scenario. GDP growth probably topped 4% in Q2, while spending intentions indicate that corporate investment could continue to drive growth in the months ahead. Markets are unfazed by Trump’s aggressive trade policies: bond and equity volatility have come down considerably since their spike in late January, while safe-haven currencies like the yen and Swiss franc have failed to perform well. True, the returns of risk assets have been modest at best so far this year, but companies continue to announce healthy quarterly earnings (and we are becoming more positive on US banks and consumer staples stocks).
Perhaps the source of Trump’s unhappiness is other currencies’ softness. Whether the Chinese are manipulating their currency or not, the renminbi fell heavily against the dollar on Thursday, continuing its recent weakness. The withdrawal of dollar liquidity as the Fed raises rates is also weighing on Chinese financial markets and may explain the plummet in gold prices (we remain neutral on gold). The prices of metals such as copper have also fallen. Emerging markets, in which we are underweight, could likewise remain under pressure if China continues to falter. We are considering our allocation to Europe in view of its exposure to external trade. But we remain more upbeat about the US, where trade concerns are offset by fiscal boosts. Maybe that will restore the president’s cheer.
César Pérez Ruiz, Head of Investments & CIO