Trump Trifecta

BY David Bassanese | 3 October 2017
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Trump Trifecta
Global Markets Review & Outlook

A hawkish US Federal Reserve and the promise of tax cuts from President Donald Trump were enough to see the trifecta of “Trump trades” – rising stocks, bond yields and the $US – all back in vogue last week, despite North Korea’s best efforts to again sink investor optimism. A firmer $US saw gold and emerging market stocks weaken.

The highlight of the week was Trump’s long-awaited plan to cut the corporate tax rate and top income tax bracket. Meanwhile, Fed chair Janet Yellen used a speech to reaffirm her desire to hike rates again in December despite continued low inflation. Does this mean the Trump trades are back in action?

Maybe. Technically, while US equities continue to trend higher, it’s still too early to say this year’s downtrends in both the US dollar and 10- year bond yields have clearly broken. Fundamentally, moreover, Trump’s tax plans are already facing criticism that they overly favour the rich, and still need to pass Congress. As for the Fed, while it can likely get away with hiking rates in December, the big test will be whether it sticks with its plan to hike rates three times in 2018 if inflation fails to move much higher. Adding to the uncertainty, we still don’t know who’ll be running the Fed next year, given Yellen’s current contract expires in January. The other challenge for the $US, at least versus the Euro, is simmering expectations that the European Central Bank is inching toward policy tightening also.

Yellen speaks again this week, though it’s unlikely she can shed more light on the Fed outlook given her already strong signals of recent weeks. Otherwise, the major highlight will be the US payrolls report on Friday, though even this will be distorted by negative hurricane effects, resulting in the market expecting an employment gain of only around 100,000.

Australian Market Review & Outlook

Locally, the key highlight last week was a further slump in iron ore prices, reflecting rising expectations that China will force more steel production cutbacks due to growing pollution concerns. Along with a firmer $US, it was enough to push the $A lower – which ended the week testing its new support level around US78c following its mid-July breakout. Once again, the S&P/ASX200 again barely budged over the week.

That said, local data last week remained upbeat, with the official measure of job vacancies posting a strong gain in the September quarter and business credit growth showing further encouraging signs of life. The highlight this week is the RBA’s Board meeting, which is likely to see the Bank still expressing confidence in the medium-term economic outlook, albeit in no hurry to lift rates. Indeed, key local data next week – retail sales and building approvals – may well highlight the challenges the economy still faces, with consumer spending softening up of late and building approvals still broadly
trending down.

Have a great week!

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