One of the joys of having an American wife and dragging her to the other side of the world, is that we get to go over to the US on a regular basis and I’m able to check the pulse of the local economy
After last year’s trip and watching blanket coverage of the Trump campaign, I was looking forward to seeing if the ‘Don’ had made any material difference to the US economy. Before I start, I’m going to give myself a small pat on the back. In the note from my June 2016 trip, I said this about Trump:
“Unfortunately his pseudo-patriotic, nationalistic chest-beating is appealing to many and… …he is likely to attract even more followers.
…the US election is rapidly turning into a least ugly contest; neither candidate is overly popular. I believe that the US election will be incredibly close – much tighter than many expect – and do not be surprised to see Donald Trump as the new President!”
On this visit – although on the face of it there didn’t seem to be any difference in the American psyche – I did detect an undercurrent of less tolerance and inclusion. That said, we were staying in a relatively strong Republican area but there were plenty of tourists from all over the US to balance that out. I did also go to my first demolition derby, which was crazy fun. However, before the event kicked off, I felt slightly awkward as we had to stand, remove hats, listen (and sing) to the national anthem while grabbing our shirts with our right hands.
I digress. Unfortunately my timing hadn’t improved, seeing as this visit coincided with the Trump’s Russian meeting scandal. So I had to endure the joy of 24/7 coverage once again on the so called ‘FAKE NEWS’ channels, and the story was dissected to death.
With all the air time, and perceived scandal – after crisis, after sacking, after scandal, the US public are becoming immune to the mass news media’s attempts to stick mud on their President. Each subsequent scandal needs to be more shocking than the last to keep the public’s interest. Some of the comments I heard from Trump voters were that they didn’t expect him to get in and, to put it in more polite terms, that they knew he wasn’t the sharpest tool in the shed. Trump voters just wanted a change from the establishment, and that was something that they were not going to get with Hillary Clinton.
I have to agree. I’m not convinced that all this speculation about Trump’s position is actually resonating with his supporter base. To be frank, they just don’t care; they want to see some improvement in their standard of living, wage growth and jobs created. Whether this will happen or not is a moot point but, in their minds, Trump probably has at least another year to deliver results.
The US economy
From what I saw from a very small sample on Long Island and upstate New York, business seems to be improving but it is still tough going; there weren’t too many home runs getting hit. Second and third tier strip malls continued to have plenty of vacancies. If anyone fancies running a Dunkin’ Donuts franchise there are lots of available spaces!
Elsewhere restaurants seemed busy without being full and shops trading seemed to be measured.
Where does all that leave the Fed? The uncertainty around Trump’s policies must play on the FOMC’s thoughts, despite not wanting to explicitly mention him. I’m sure that the global low inflation environment also is a big focus. In fact, in the FOMC statement released last week, the Fed noted:
“On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent.”
The statement was certainly perceived to be on the dovish side and as a result USTs rallied on the day of the release; the 10yr UST yield fell 5bps to 2.29%. In addition, the probability of a rate hike in December fell to 42% from 47%.
I continue to believe that rates in the US will not rise as much as the market is pricing in. The business and credit cycle is already long in the tooth and the Fed may soon have to adopt an accommodative monetary policy stance as the US economy slows. On that point, last week the IMF downgraded US growth to 2.1% (from 2.3% in April) and 2.1% (from 2.5%) in 2017 and 2018, respectively.
The Australian dollar
Despite last week’s weaker Australian headline CPI, the Australian dollar cracked the US80c level for the first time since May 2015. The RBA’s preferred measures were actually in line with forecasts, coupled with comments that the RBA doesn’t have to follow the global trend towards tightening momentary policy. The result was certainly helped by the above dovish FOMC statement.
While on a technical, short term basis, the Australian dollar may appreciate further – the path of least resistance seems to be higher. Most analysts agree that the over the longer term the Australian dollar is overvalued at current levels. My long held view is that the Australian dollar will trade in the US75-70c range for the next six to 12 months.
If you agree with that view on the currency, now could be a good time to take advantage of some US dollar bonds that we have available. Our trading desk currently has good supply in the following names:
|Company ||Credit rating ||Maturity date ||Yield to worst |
|American Axle and MFG Inc |
|B ||01/04/2023 ||5.87% |
|Ensco PLC |
|BB ||15/03/2025 ||8.19% |
|Frontier Communications Corporation |
|B+ ||15/01/2023 ||11.05% |
|Rackspace Hosting Inc ||B+ ||15/11/2022 ||6.30% |
|Transocean Inc ||BB- ||15/07/2023 ||7.24% |
*Minimum investment USD 10,000
Source: FIIG Securities
Pricing accurate as at 31 July 2017 but subject to change.