The economy trumps politics

Week ending Friday 19th May 2017

A mixed week in terms of economic news led the equity markets to end up nearly where they started, but politics made a big splash that was mostly dissipated. Underlying economic trends trump politics, it seems.

The USD has maintained its recent run of weakness, undoubtedly helping equities too. The general weakness in the USD may also be something to do with the huge and continuing rally in Bitcoin. It seems hard to believe investors really think that the digital currency could be a reserve currency but its uses appear to be growing.

Bond markets have been fairly quiet despite the yield curve continuing to gradually flatten out. The 10yr less 2yr gap has fallen below 100bps for the first time since before the Trump win.

The USD is telling us monetary policy has eased off, confirmed by the resilience of equities, despite bond markets telling us nominal growth is likely to remain low. This “Goldilocks” scenario seems unlikely to last, but for now it is what we have. It would seem to indicate that the “financial conditions” model of monetary policy envisaged by Dudley is on top for now at the Fed. Growth remains frustratingly low but recession risk is equally low.

Economic news mixed

Both Industrial and Manufacturing production for April were above expectations. The longer term dull trends were not broken, but the MoM growth was surprisingly strong given very mixed surveys for April from the regional Feds and the PMIs.

The two major current month regional Fed surveys showed some contrasts, as the NY Fed slumped down to a negative view while current conditions in the Philly Fed region were back to the insane highs of recent months. Expectations in the Philly Fed area did fall back heavily though.

It makes you wonder whether politics has infected some of the form filling by those business people surveyed, with Trump supporters in the corporate community trying to express their support in non-standard ways. That said, earnings reports from corporates have been very strong in 2017Q1 and that strength appears to be holding up into 2017Q2.

The rebound on Thursday and Friday in the S&P500 has been impressive. There must really be some economic momentum out there that isn’t being derailed by Trumps travails over Russian links.

The Atlanta Fed GDPnow is impressively robust at 4.1% for 2017Q2. The New York Fed Nowcast projects 2.3%. These nowcasts can vary widely as new information is added.

Coming week releases

No major data will be released in the upcoming week. The second estimate for 2017Q1 GDP will be released and includes the data for the income version, RGDI and NGDI. The latter heavily influences our own NGDP forecast, more so than the expenditure version of national output that is used to derive the GDP figures in the US.

Surveys out next week will be interesting as the Markit PMIs, KC Fed and UMich reports last month all showed a big drop.

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