Financial markets were hit Wednesday by President DonaldTrump’s comments at his Arizona rally.
As a general rule, financial markets don't care what politicians say because politicians don't make much of a difference in the near term.
In the near term, the economy depends on the answers to two specific questions:
- Do I have a job?
- Can I afford to buy what I want to buy?
However, Trump’s threats to end the NAFTA agreement would certainly hurt lower income Americans’ ability to afford things and they affect jobs.
A government shutdown would also hurt job security and possibly affect the ability of some in the economy to be able to buy things.
The economic reach of Trump’s threats is therefore worthy of market attention.
It remains to be seen whether the conciliatory remarks that the president subsequently read from a teleprompter will contain further market damage.
It is worth remembering that the president has more unrestricted destructive power than unrestricted constructive power. Destructive policies can often be implemented without Congressional approval. Constructive policies need Congressional agreement.
Meanwhile, central bankers and economists head to the Jackson Hole Economic Policy Symposium in Wyoming, which starts today and where the main event tomorrow is Fed Chair Janet Yellen’s speech, but where also tomorrow ECB President Mario Draghi will give his speech.
Anyway, the start of the symposium may at least shift some of the market immediate attention back onto fundamental economics.
Fundamentally, the world economy is proving resilient, operating in a mid-cycle growth manner and generally behaving itself.
Draghi on Wednesday in Germany gave a theoretical defense of the ECB’s policy position talking about the need for policy to adapt, which can be carefully labeled under the phrase: “Statement of the obvious.”
He then used that position to defend past policy decisions of the ECB.
The need for flexibility does not necessarily mean that the ECB’s specific policy choices have always been the right choices.
Today, we got the quarterly released data on the state of the economic cycles from Spain and the United Kingdom.
The Spanish economy is often cited as a paragon of virtue for its recovery from the debts of the crisis, but it is worth looking at the “nominal” GDP figure, which has been a little bit less robust as the quarterly reported data for June came in at 3.40 percent, which was down from 3.96 percent in March
This matters, because it is nominal GDP that determines the debt metrics of a country.
The United Kingdom of course is a story of decline, where GDP expanded by 1.7 percent (y/y) during the latest quarter after rising 2 percent (y/y) in the previous quarter, all that in the wake of the EU referendum result and the Brexit negotiations, although some of this is more cyclical than structural necessarily. The breakdown of GDP into its components is more useful in assessing where the damage of the EU exit negotiations will be felt, and from that trying to get a sense of where the UK economy may head over the median term.
Sterling’s weakness recently perhaps adds to the focus on the today’s data.
After yesterday’s better business confidence data that we got from the Euro area PMI’s, I think perhaps only for comparison, it could be interesting to take a look at also yesterday released IHS Markit Flash U.S. PMI that indicated the US private sector growth reached a 27-month high in August.
Rob Dobson, Director at IHS Markit commented: “The U.S. economic growth story remained a tale of two sectors in August. The overall rate of expansion accelerated to a 27-month record, driven higher by strong and improved growth of business activity in the vast services economy. In contrast, the performance of manufacturing remained sluggish in comparison, with production volumes rising to the weakest extent in over a year."
He continued: "Nonetheless, the acceleration signaled for the economy as a whole suggests that GDP growth is still gaining momentum during the third quarter. With new order inflows also strengthening and job creation equaling its best pace in the year-to-date, economic growth should remain on course to outperform relative to the second quarter.”
Let’s now wait and see if that statement will be confirmed in Fed Chair Yellen’s speech tomorrow in Jackson Hole.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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