Note July 18,2018: A Chockful of Developments – A chockful of developments range from politics to policy to growth and into corporate reporting season. In politics, it has already been extraordinary. The emergence of checks and balances is overdue but does remain to be seen. The potential impact of the faux pas of late exceed those of a Russian prime minister thumping his shoe at the United Nations or later, its president snubbing counterparts at Shannon. Currently as superpower, the U.S. President appeared to raise questions of commitment to power balances. On trade, U.S. tariffs have been raised for European and other allies. U.S. initiations have sparked tit-for-tat tariffs potentially on hundreds of billions in trade between it and China, as the latter raises firm response in equivalence.
The IMF WEO report of July 16, 2018 does envisage world GDP growth closer to 4% annually. Emerging country growth appears closer to 5% per year but most heft appears from India and China, both being in the 6 ½ – 7 ½ % range. Many other emerging countries have far less. Suggestions appear growth could be cut 0.5% from tariffs. Subsequent to the U.S. Federal Reserve semiannual Monetary Policy Testimony to Congress of July 17,2018 with a PCE Deflator of 2.3 % and on being data driven, we still see Fed Funds of 3.5% as appropriate into Q2/2019, albeit even if a terminal rate.
Even by current cycle standards and certainly by those of prior cycles, market reactions appear obtuse. However, the sense of suspended disbelief could soon lift and would likely be experienced first in elevated volatility. In contrast to the many points of time in this cycle when simply beating oft reduced consensus was regarded as success, we believe there is an urgency to focusing on revenue delivery and financial strength as corporate and indeed country results are released over the next several weeks. The Financials remain crucial to market direction.
In politics, it has already been an extraordinary summer. The emergence of checks and balances is overdue but does remain to be seen. Election angst has ranged from Brazil to Mexico to Turkey. Elections in the United States, Canada and India are still to come over the next year, to name a few. Other political relationships also appear. European politics seem weak, including a fracture inducing Italian coalition and Britain wracked by the realization of the tribulations of Brexit. The potential impact of the faux pas of late exceed those of a Russian prime minister thumping his shoe at the United Nations at the height of the cold war or at the height of opening up, a Russian president being ensconced aboard his aircraft parked at Shannon while his hosts remained waiting in vain on the tarmac. Currently as superpower, the U.S. President earlier appeared to raise questions of commitment to power balances in east Asia at the Singapore U.S./North Korea summit in Singapore, then berate allies at the NATO summit at Brussels, followed by a meek performance at the U.S./Russia summit in Helsinki and then raising concerns about commitments to specific strategic NATO allies like Montenegro.
On trade amid concomitant developments, erstwhile and carefully crafted communiques were brusquely brushed off after the G-7 summit in Canada and the host subsequently berated. The same was in July to be the fate of the British prime minister during an official visit, with the addition of unrequested interference by the U.S. president in the internal matters of leadership on Brexit. On the issues of trade, the present realities are that U.S. tariffs have been raised for European and other allies, ostensibly on national security grounds. U.S. tariff war initiations have also been behind a now retaliatory series of tit-for-tat tariffs potentially on hundreds of billions in trade between it and China, as the latter makes clear its determination to respond in equivalence.
Within the context of close to 4% annual world GDP growth, some suggestions appear that tariff wars could curb such growth by 0.5%. Such a development would be far from salutary, not least in a near term context. For instance, in the recently released July 16, 2018 IMF World Economic Outlook (WEO) report, growth in Europe is seen at only around 2% and that of Japan only around 1% per year. Further, while the IMF WEO report of July 16, 2018 does envisage emerging country growth of closer to 5% per year, most of the heft appears to be coming from India and China both being in the 6 ½ – 7 ½ % range. Many other emerging countries appear to be recording far less. Meanwhile, the U.S. Federal Reserve semiannual Monetary Policy Testimony to Congress of July 17,2018 cites ongoing U.S. growth, increasing employment with an unemployment rate below 4% as well as a Personal Consumption Expenditures (PCE) deflator of 2.3 % as aspects for ongoing and modest, likely 25 basis point rate increases, in its Fed Funds rate. On being data driven, we remain of the view that Fed Funds of 3.5% would be appropriate into Q2/2019, albeit even if a terminal rate. In contrast to the many points of time in this cycle when simply beating oft reduced consensus was regarded as success, we believe there is an urgency to focusing on revenue delivery and financial strength as corporate and indeed country results are released over the next several weeks. With the issues of capital strength and the quality of assets still in play, the Financials are likely to be crucial for the direction of capital markets. In this cycle, non-bank financials and lending exposure therein are also likely to be issues.
StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e