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By David Morrison  |  24/08/2018 13:44
”trade

The current US bull market is now the longest on record as the S&P 500, NASDAQ 100 and Russell 2000 flirt with their all-time highs

The longest-ever US bull market continues, despite severe pressure on emerging markets, no breakthrough on tariffs between the US and China, Trump’s political woes and the expectation of further monetary tightening from the US Federal Reserve. This comes as the European majors tack sideways with a downside bias while China’s Shanghai Composite remains in a bear market. The fact that there’s such a marked divergence between the relative performances of US and Chinese equities should only embolden the Trump administration in pushing ahead with further tariffs.

Powell speaks at Jackson Hole

Federal Reserve Chairman Jerome Powell is the star attraction at this week’s Jackson Hole Economic Symposium. Mr Powell will be speaking on Friday afternoon (after publication of this note) and market participants will be paying close attention to what he says, particularly regarding the timetable for further rate hikes and the reduction in the Fed’s balance sheet. The current expectation is that the Fed will raise rates by 25 basis points in September, and again in December. So, if Mr Powell signals that the US central bank is concerned about the sell-off in emerging markets or the continued flattening of the US Treasury yield curve and may consider a pause in the current quarterly rate hike cycle, this would weigh on the dollar and remove some immediate emerging market risk.

FOMC minutes

But it would be a surprise if he did. The minutes of the Fed’s last meeting in July/August reinforced the FOMC’s confidence in the US economy saying: "Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation” and: "Participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with a sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2% objective over the medium term."

Fed’s balance sheet

But a couple of participants raised the subject of the size and composition of the Fed’s balance sheet. It has been suggested that the Fed may signal that it is prepared to run a larger balance sheet than previously forecast by analysts. If this is the case, then this would be dollar-positive.

Trump dumps on Powell

Jerome Powell’s job has been complicated by recent comments from Donald Trump. Earlier this week the President warned Mr Powell and the Federal Reserve not to raise interest rates further, saying the Fed should do more to help him to boost the economy. It would be very unlikely that Jerome Powell would sway in the face of such unwarranted political intervention. But this being so and knowing the Trump administration’s desire for a weaker dollar, we shouldn’t be surprised if the president intervenes verbally in the coming weeks and months to ‘talk down’ the greenback. He certainly has ‘previous’ on this.

US politics and China

In the same Reuters interview Mr Trump accused China of guiding its currency lower and said there was little hope of progress in the ongoing trade dispute between the two countries in this week’s talks. Those talks ended yesterday with no progress made. Additionally, it is understood that Chinese officials have hinted that there will be no further negotiations until after the US mid-term elections in November. It looks as if China is prepared to sit back and watch Trump struggle with the fall-out from the Manafort and Cohen trials. China will also want to wait for the mid-term election results to see if the Republicans lose control of the lower house which would weaken President Trump’s position.

Trade tit-for-tat

China and the US have just slapped additional tariffs on each other. The two countries have now imposed tit-for-tat tariffs on a combined $100 billion of goods over the last two months and are threatening more. The aggregate view amongst economists, per Reuters, is that every $100 billion of imports hit by tariffs will reduce global trade by around 0.5%. China’s economic growth is forecast to lose around 0.2% in 2018, with even less effect on the US. But a larger impact is expected next year, dragging in other countries and companies tied into China’s global supply chains.

Yuan set to weaken further?

Trump has demanded that China makes significant changes to its intellectual property practices and undertakes to import more US goods and services. If not, Trump has threatened to slap tariffs on close to all of China’s exports to the US, which was worth over $500 billion in 2017. As Chinese imports from the US were around $130 billion last year, Beijing could retaliate by allowing its currency to depreciate further.

US “winning” the trade war

On Wednesday US Commerce Secretary Wilbur Ross said on CNBC: “…at the end of the day, we have many more bullets than they do. They know it. We have a much stronger economy than they have, they know that too," Ross added: "if the market were worried about trade, it wouldn't be at a record."
The Trump administration continues to point to US stock market strength, and Chinese stock market weakness, as evidence that tariffs are having the desired effect. Whether this will still be the case if the trade war escalates over the coming months remains to be seen. As mentioned in an earlier note, if President Trump thinks the yuan is too cheap with a USDCNY rate around 6.85, he’ll choke on his Big Mac if it goes on to break above 7.00.

Looking ahead

There’s a fair amount of data to look out for in next week’s economic calendar. However, most is ‘second order’ and isn’t expected to influence financial markets to a great degree. The exceptions to this are the first revision to US second quarter GDP on Wednesday, US Core PCE (the Fed’s preferred inflation measure) due Thursday with Chinese Manufacturing and Non-Manufacturing PMIs and the Euro zone’s CPI Flash Estimate on Friday.
 
 
 
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