For several years now, markets have focused almost exclusively on the Chairperson of the Federal Reserve Board (FRB). In the last 3 months, we have seen an extreme shift in that attention…
Since the US election, the markets have experienced the ‘Trump Bump’. The positive trend in economic data during that time has been over-shadowed by the new President. Throughout the better part of the current economic expansion, the focus has been on FRB activity and monetary policy, for good reason. As Washington was mired in a veritable gridlock, nothing was coming in the form of fiscal assistance. So, monetary policy naturally became the be-all-end-all.
US Data
In addition to the inauguration of President Trump, there were several pieces of economic data released last week. The Core Consumer Price Index (CPI), which removes fuel and food, came in at a healthy 2.2% annualized. This has been steady for much of the last year. Industrial production had a strong uptick, with a 0.8% increase. This should be a good indication for 4th quarter GDP. There was a bit of housing data, which also showed promise last week. Housing starts were up 124K in December, representing an increase of 11.3%. This should lead to strong closings come spring[1].
In addition to the data above, the FRB chair, Janet Yellen, spoke on 1/18 indicating the economy is picking up steam. This means the FRB is likely to be hawkish in 2017. Being hawkish means they could be more inclined to raise rates. Part of her speech indicated that allowing markets to run hot would be unwise… In the last month, markets have been anything but hot! The shocking aspect of this is that the markets barely moved in response. This would have typically been a major sell event.
International Data
China met their 2016 GDP target of 6.5% to 7% growth, coming in at 6.7% for the year. This was not achieved without some heavy lifting by the government. There was quite a bit of debt creation and currency manipulation in order to meet that target. Also, President Xi Jinping warned that there would be no winners in a trade war. The populist view that is sweeping the world is a hindrance to globalization[2]. His statement is a clear plea, as China is reliant on trade.
Eurozone inflation has begun to increase, but the European Central Bank (ECB) is not claiming victory quite yet. They have sited transient impactors, such as fuel, as causing the recent increase. They are likely to stay the course with their current stimulus for the majority of 2017, if not into 2018.
Conclusion
The reason for the shift in overall focus from monetary policy to fiscal policy in the US is not because of Donald J. Trump… not entirely that is. Truly the full alignment of political power brings one certainty and that is change. With that inevitability, markets are watching to see when and where money needs to be allocated for future profitability.
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[1] www.investing.com – economic calendar
[2] www.mfs.com – week in review