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Winning the trade war or supporting a slowing economy ?
Trump: false narrative
In our view, the media & market is circulating a false narrative regarding relationship between President Trump reelections prospect and US growth. The thinking goes that a weaker economy will lower Trumps changes for a second term. Therefore, he will have to pick between winning a trade war or support weakening economic growth. Our view is that Trump can, “have his cake and eat it too”. While Trumps generic polling numbers have a relationship with economic outlook, his core base remains unmoved and extremely strong. As the world has learned in 2000 and 2016 presidential elections’ its not the popular vote but electoral college that puts a person in the White House. Trump hold of this base will deliver a win in 2020.
July Purdue Center for Commercial Agriculture latest survey of farmers sentiment indicated popularity among farmers rose to 79% from 74%. Fifty-three percent said they “strongly approve” of President Trump, up from 50% in June. Farmers have been on the front line in the trade war. Their continued support indicates the devotion of Trumps political base. Reuters/Ipsos public opinion poll shows approval among members of his Republican Party at a solid 72%. In fact we could see Trump escalate tensions in order to force the Fed to cut interest rates 25-50bp. Should Trump manufacture lower Interest rates and negotiate lower of US-China trade tensions the US economy would slingshot higher, just in time for Presidential Elections.
Politized Fed will cut
The politicization of the Fed is nothing new. But has taken a worry turn under Trump policy via tweet. The divergence growth outlook leave plenty of room for interpretation. The negative scenario urging for decisive policy actions, providing impactful stimulus or wait until actual outcomes developed allowing policy makers to keep powder dry. In our view currently, the US backdrop does not warrant interest rate cuts. US GDP growth has slowed to 2.0% (tracking 1.9% in 3Q) but strong domestic demand will offset softness in expenditures. Also core PCE Inflation has picked up in recent months only slightly below FOMC 2% target. However, the greater Fed members become less independent the more they will be influenced by passions over data. X-NY Fed Bill Dudley editorial throws out policy independence and jumps into partisan politics defining US president Trump as “a threat to the U.S. and global economy.” Our view for protracting US-China trade tensions means expectations for economic weakness will persist. In this scenario, we anticipated the Fed to cut 25bp in September.
Forecasting Brexit has gone from hard to impossible. The fluid, politically charged situation means probability scenario changes with the news cycle. Time like this we would just like some popcorn to watch the action from the sidelines. It looks like the UK is heading for another useless extension. One thing is for sure, for the UK's economic outlook, extra uncertainty will further damage economic growth and investor appetite. Tuesdays, construction PMI data which fell to 45 against 46.5 expected, highlighted the harm prolonged ambiguity is having on activity. Today, services PMI dropped to 50.6 in August, from 51.4 in July. Fall in Service PMI indicates that the critical services sector of the economy is just holding on.
Given the number of Tories rebelling today's anti no-deal Brexit legislation is likely to succeed. PM Johnson has indicated that he would not go back to Brussels to ask for another extension. Now PM Johnson indicated that he would push for a general election under the Fixed-term Parliaments Act but Leader of the Opposition, Jeremy Corbyn stated labor would not lend vital votes for a general election until another Article 50 extension had been secured. Despite the noise, the probability of a no-deal exit remains the highest outcome in our view.