After being a dead movement in the United States since the early 1900’s, Populism has surged back in a big way. What implications does it have for the markets?
The unemployment rate ticked up to 4.8% from 4.7%, but participation increased to 62.9% from 62.7%. Often when we see an uptick in participation (a signal of a healthy job market) unemployment will marginally increase as well. More concerning were the wage growth readings, which took a step back to 2.5% year over year from 2.9% in December. Slower wage growth means lower inflation in the future; alternatively, the measure simply could be correcting from a strong December reading.
Federal Reserve Board (FRB) rate hike expectations have diminished as little fiscal spending has been announced. According to the FRB, they do not require additional fiscal spending to warrant a rate increase. Market expectations have scaled back the likelihood in the near term. The most likely candidate for the next adjustment is June and the markets are only pricing in one hike for 2017.
On Friday, Trump issued an executive order for a review of Dodd-Frank. This could have wide sweeping implications from profit margins all the way to lending for small businesses. Less cash requirements on banks, means more money to lend to small businesses. Less regulation on banks also means more risk of bank failures in the future.
It could be said that Europe had a banner year in 2016, as GDP out-paced the US, inflation grew by 1.8%, and unemployment retreated. US GDP was lack luster at 1.6%, so while an accomplishment, not truly astonishing. Inflation mainly saw its rebound as a result of re-emerging energy prices. The EU has some ways to go for their economic growth to be truly sustainable. A weaker € will continue to help the process. Recent manufacturing data supports forward looking growth as well, with PMI coming in at 55.2, up from 54.9 (over 50 indicates expansionary activity).
Greece is gearing up for another round of financial instability this spring. The IMF is reporting the financial burden of debt in Greece could cause a major default by 2030. This could bring further chaos for the EU, which is already struggling as the UK seems to be successfully navigating its exit.
Brexit took one step forward as Parliament cleared the path for Theresa May to execute Article 50. Continued progress towards Brexit makes it seem as though additional countries will be following suit. While the outlook for the UK is better, manufacturing PMI did regress slightly to 55.9 from 56.1.
The full party alignment of government has removed the focus from earnings season and to action/inaction by Washington. Last week was a heavy week of earnings report with much of the focus on the travel ban and review of Dodd-Frank.
Populism has been dead for 100 years. Since the financial crisis there has been a growing discontent for how things have been done, or left undone. With populism upon us, the question bares asking, how will it impact the markets? Truly as populism was born of a distrust of corporate power and urban political control, corporate profits should be in focus. The difference here is that the focus is not so much on corporate control as much as globalization. This being the case corporations that derive their revenue from within our borders will likely benefit. Additionally, international companies that focus their revenue in the US stand to benefit from our economic growth as well as a strengthening $.
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