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Investors Must Focus on Trump's Sway Over Trade

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Monday, 17 Jul 2017 09:41 AM Current | Bio | Archive

It is “Made in America Week.”

“Made in America” (on trade), “American Heroes” (on military), and “American Dreams” (on jobs) will be the administration's focal points during the next 21 days.

Nevertheless, the president’s focus on trade was confirmed by transcripts of an off-the-record conversation he had with the press aboard Air Force One en route to Paris, France.

This focus of Trump on trade should be of  concern for investors.

Economic nationalism tends to hurt lower income groups in society and can potentially lower trend growth over time by diverting economic resources to areas where there is no comparative advantage.

Trump has far more authority over trade than over other parts of the government’s agenda.

In the meantime, Trumpcare continues to face setbacks while Reuters reports that 8 to 10 Republican Senators have serious concerns about Republican healthcare legislation to roll back Obamacare.

Frustration with the legislative agenda may re-double the administration’s focus on trade as a more controllable issue.

In Europe, talks between the U.K. and the European Union (EU) resume after a weekend of conflict among members of the U.K. government. The focus is to be the rights of EU citizens in the U.K. and of British subjects in the EU.

This is not likely to be of much “direct” concern to financial markets although it may be of some personal concern to those involved in financial markets. However, an early agreement on this topic would potentially send a positive signal about the ability of the two sides to negotiate in a mature, sensible, rational manner.

Euro area consumer price inflation came in at 1.3 percent, down from 1.4 percent in May. 

The core inflation rate came in at 1.1 percent up from 0.9 percent in May. 

The convergence of the core and headline consumer price inflation (CPI) is now largely complete as oil price effects fade from the data. There is still some residual oil price impact to be felt in the core data. Core inflation responds to oil price changes with a longer lag than does headline inflation.

As with the U.S. inflation data that came out on Friday and that showed headline CPI unchanged at 1.6 percent while core inflation came in also unchanged at 1.7 percent, it’s a fact that weird statistical quirks assume greater importance in a lower inflation world, which is one of the things that markets do not want to recognize.

This matters far more today than when inflation where we have inflation at around 2 percent as in the U.S. than when inflation was averaging around 4-5 percent.

Central banks have to focus on the underlying trends rather than statistical quirks or as we could call it “fake” inflation caused like for example by a relatively substantial price move in the mobile phone sector. 

This is one of the reasons that the Fed favors the PCE deflater that uses a chained index which compares one quarter's price to the previous quarter's instead of choosing a fixed base.

The U.S. PCE for May came in at 1.4 percent for May, while for the number of June we’ll have to wait until August 1,

The PCE is subject to less outcome than the consumer price inflation (CPI) measure.

Markets however, still consider consumer price inflation (CPI) as being more important than the PCE deflator.

Market odds of a third Fed rate rise this year fell below 50 percent after the weaker than expected U.S. data on Friday.

From mi side, and with what we know today, I still expect a third rate hike this year, also because the basics for inflation in the U.S. remain alive and well.

The Philips curve, the relationship between inflation and the labor market still holds good as long as people look at “genuine” inflation rather than the “fake” inflation caused by statistical adjustment.

Meanwhile, China’s GDP growth was reported at 6.9 percent during the second quarter.

Obviously there seems no need to question the data and markets would certainly not dream of questioning the data. Why should markets do that?

Anyway, the report fits with the idea of a sharing economy.

Developed economies are sharing their growth with exporters in emerging markets like China, but that does not mean we have to blindly accept Chinese data to the last decimal point.

The domestic demand element of the Chinese economy was evident in solid retail sales data.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Economic nationalism tends to hurt lower income groups in society and can potentially lower trend growth over time by diverting economic resources to areas where there is no comparative advantage.
trump, trade, investor, stocks
Monday, 17 Jul 2017 09:41 AM
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