US: Investors focus primarily on Trump - Westpac

Bill Evans, Chief Economist at Westpac, suggests that investors who have traditionally focussed primarily on central banks now focus primarily on Trump.

Key Quotes

“One debate is whether current pricing for interest rates; the USD; and the stock market is dependent on a successful fiscal policy outcome for Trump.  Alternatively, pricing might be factoring in some economic reform (particularly banking) and not much more.  The answer is probably that the share market is more optimistic about a successful policy outcome than the bond market. Bank deregulation (freeing up bank lending) would be stimulatory as long as confidence holds and, with the Fed now proclaiming that the US economy is at full employment, the higher bond rates are justified. However, if the share market needs a successful fiscal plan (centred on tax cuts) to hold current levels, then equities would be vulnerable to a marked sell off in the share market should the plan prove to be elusive.”

“The problems with a significant tax cut are manifest.  It seems that there are around five Republicans in the deficit hawk camp who are firmly opposed to any policy that is not “revenue neutral” and five are “soft no’s”. The current controversy over Russia will only harden opposition within the party.”

“Overall, arbitrary tariffs are likely to be a more distortive mechanism than the Border Tax.  However, that option, linked with some unpopular entitlement reform, might be back-end loaded and more modest tax cuts might constitute a plan that could be manipulated to “look” revenue neutral.”

“In such circumstances, the USD would rise further but the inevitable response from other trading countries would likely trigger a disruptive trade war – the recent encouraging lift in global PMI’s and global equity markets would soon dissipate.”