US President Donald Trump speaks to a joint session of Congress during the usually quiet hours of the Asian session in a speech that is anticipated to touch on many economic priorities.
Nearly 40 days into his presidency and nearly four months after winning the elections, will we get a definitive Donald Disappointment? Or will he say the world that markets want to hear, injecting fresh fuel into the rally?
Stocks and the dollar are at different stages of the Trump trade.
The Trump Trade
After the shock victory in November, the market’s thinking was that his promises of fiscal stimulus and lower taxes would boost growth, push inflation higher and interest rates would rise.
Stocks rallied on higher growth prospects as well as hopes for deregulation under a unified Republican government. Stock indices are reaching new record highs in recent days.
The dollar took a different path: rallying with stocks in late 2016 but stagnating in early 2017. One of the reasons was that the Federal Reserve had raised its own forecasts based on Trump’s promises. The usually conservative and cautious institution is usually “data-dependent” and not election promise dependent.
The dollar also stalled due to a reality check: promises cannot be kept. In addition, Trump’s erratic behaviour and his priorities such as the Muslim ban are not in line with what markets want to see from the administration.
New promises about a “phenomenal tax plan” were good for stocks but not for the dollar.
The bigger test
Ahead of the speech to Congress, due on March 1st at 2:00 GMT (21:00 in Washington), Trump gave some hints about his economic drives, and they provide causes to worry.
- Defense spending: Markets want infrastructure, not defense.
- Obamacare, not taxes: Apart from some health-related stocks, markets care a bit less about changes to healthcare but want to see deep tax cuts.
- Wrong offsetting: Enhanced defense spending worth $54 billion will come at the expense of other expenditure, but not Medicare. Markets want more spending in general. Once again, infrastructure is absent.
The dollar was on the back foot due to these reports but managed to recover, also thanks to higher expectations for a rate hike from the Fed, and of course, anticipation to the speech itself.
If these priorities are confirmed, it could move stocks from the rally mode to a stagnation mode. For the dollar, things could get worse: from stagnation to a downfall, or at least a partial reversal of the Trump trade.
In any case, the biggest currency moves in reaction to Trump’s speech will be seen against the yen. USD/JPY has proved to be the biggest mover. However, a clear verdict, seen possibly only in the European session, will likely be seen against a wide array of currencies.
What do you think?
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