The Weekly Update

At the beginning of last week the market had priced in just a 40% chance of a March rate move. What a difference one week makes, as that level is now around 90% following some hawkish comments from Fed officials. San Francisco Fed President Williams said that a March hike is getting “serious consideration” given that the Fed is “very close” to achieving its dual mandate goals. Later and in an interview with CNN, NY Fed President Dudley said that the case for tightening had become “a lot more compelling in recent months” and that “risks to the outlook are now starting to tilt to the upside”. Finally, Fed Chair Yellen said that “at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”. She also added that “given how close we are to meeting our statutory goals, and in the absence of new developments that might materially worsen the economic outlook, the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016”.

During the week, President Trump delivered his first speech to Congress. In what was a much more crafted and rousing speech than we have become recently accustomed to, he sought to garner further support for his policies which include (in approximate order of planned implementation): repealing Obamacare, tax reform, deregulation and infrastructure investment. Of course, he hopes the 'Great Great Wall' of America can jump the queue to help speedily address the drug and perceived immigration issues that are threatening the safety and wellbeing of American families and workers. Though with the wall estimated to cost somewhere between $10-20bn it's hard to accept the plan's cost efficiency and efficacy for addressing these problems (given that, for example, 40% of Mexican immigrants come via airplanes, and the strong consensus that a wall would do little to stem the inflow of drugs).

This order of policy priority is more of a necessity than a preference for the Administration. For they will need to make good ground addressing costly healthcare reform before fully pushing for tax reforms that both benefit middle-class and have a chance of passing the House and Senate. Delivering on these will then make it easier to successfully secure additional spending on infrastructure.

But as always the devil is in the detail, and as radical as the new White House is, they need sufficient backing from the Hill. Executive orders only go so far, and as we have seen can be repealed. Even with the number of seats the Republicans have, it is still proving difficult to find a compromise on disliked Obamacare, let alone the other policy initiatives. Congress is already at a crawl due to divisions amongst Republicans on the issue. Although some existing aspects have strong support, such as providing for those with pre-existing conditions; and some new aspects have unified backing, like 'freedom to purchase health-insurance across state lines' which received a hearty applause from Republicans; there are numerous aspects on which administration cannot find a consensus. Healthcare tax credits is one example which Trump advocated for in his speech, but which Conservatives are strongly against. Finding sufficient common ground is clearly going to take much longer than many expected.

Hillary Clinton previously had a rebuking campaign slogan to 'Build bridges, not walls', but it seems in some way Trump is trying to build both. In the speech Trump told of how 'America is willing to find new friends and forge new partnerships, where shared interests combine.' Moreover, domestically Trump called again and again for a unified bipartisan front stating, 'We must build bridges of cooperation and trust, not drive the wedge of disunity'.

But behind all this vision for a 'Renewal of the American Spirit' (the title of his speech) there continues to remain a lack of detail in the vision: something markets and the American people are becoming increasingly anxious for as the days roll into months. Given that 'The stock market has gained almost $3 trillion in value since the election on November 8, a record.' if this lack of specificity continues there is concern that these valuations, based mostly on optimistic short-term growth expectations, will revert to concerns over lower long-term growth: which has changed little or likely worsened since Trump was elected.