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Trump's Ability to Sway Congress Not as Important to Investors Anymore

Trump's Ability to Sway Congress Not as Important to Investors Anymore
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Tuesday, 09 January 2018 07:18 AM Current | Bio | Archive

It seems as if the book “Fire and Fury” has become one of the most quickly consumed books since “Harry Potter and the Deathly Hallows,” which was a fantasy novel written by British author J. K. Rowling and the seventh and final novel of the Harry Potter series.

Now, does the content of “Fire and Fury” matter to markets?

Probably not.

With tax cuts passed, the ability of President Trump to influence Congress has become much less important to financial markets. In the things that matter to markets now are the debt ceiling, the budget, etc., and it will be Congress and not the White House that will provide leadership.

The limited political capital of the current White House may that high likely before this weekend and any further marginal decline in the political capital of the current White House is not worth reflecting in financial asset prices.

On the tax cuts, White House economists have said that there is no need for the Fed to pick up the pace of rate hikes as a result of the tax cuts.

By the way, I’m one of those that are not looking for the Fed to pick up the pace of rate increases expecting two or three hikes over the course of this year.

However, I’m also not expecting that much of a growth impact from the tax reductions.

All things considered, maybe a quarter of one percent or so, which, given the margin of error in U.S. GDP statistics, is not necessarily that easy to observe.

From the Euro area we got today retail sales that rose by 2.8 percent year-on-year in November 2017, following an downwardly revised 0.2 percent gain in October and well above market expectations of 2.2 percent.

The fact that the numbers are for November makes them a little bit outdated, but domestic demand story in the Euro area is important.

The Eurozone's economic sentiment index rose to 116 in December 2017 from 114.6 in the previous month, easily beating market expectations of 114.8. It was the highest level since October 2000.

In the U.S., personal consumption expenditures jumped 0.6 percent month-over-month in November, following a downwardly revised 0.2 percent increase in October. Figures came above market expectations of a 0.5 percent gain, mainly boosted by consumption of recreational goods and utilities.

It’s really interesting to take note of the fact that we now see how the major economies are experiencing a “simultaneous” rather than a “synchronized” growth improvement. Strong domestic demand in the United States and in Europe are supporting overall economic growth.

However, and this is worth keeping in mind, simultaneous improvement is giving a boost to trade in the Asian region, and elsewhere of course, and that’s have been evident in the numbers going into the end(!) of 2017.

Besides all that, the Saudi Arabian government began this year in a bold manner tackling their fiscal deficit with the introduction of a value-added sales tax or VAT sales tax, also known in some countries as a goods and services tax (GST), as well as fuel prices increases.

The Saudis continue to act by boldly raising the salaries of the civil servants and the military over the course of the last weekend at a cost that has been estimated to total somewhere between $13 billion and $14 billion.

Now, why is this of interest to investors who have dollars and euros?

If the Saudis and others in the Middle East continue to run deficits, then the pressure is on to dip into savings to pay for those deficits.

As Saudi and Middle Eastern savings are disproportionally held in dollars and the Saudi and Middle Eastern spending is disproportionally directed towards Asia and Europe, using savings to finance spending that than logically translates then into an important “out-of-dollar-into-euro” flow.

And with the oil price likely to moderate as the shale production in the U.S. increases this year, the pressure from this savings-into-consumption flow is likely to increase, which could have further implications, yes in plural, for capital flows and foreign exchange markets.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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With tax cuts passed, the ability of President Trump to influence Congress has become much less important to financial markets. In the things that matter to markets now are the debt ceiling, the budget, etc., and it will be Congress and not the White House that will provide leadership.
trump, financial, markets, congress
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2018-18-09
Tuesday, 09 January 2018 07:18 AM
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