01 MAR

2017

Asset Allocation, Topics

Donald Trump kicks off a crucial week

US President Donald Trump’s address to Congress did not stop the music financial markets are listening to. The next hurdle will be digesting the potential Fed hike later this month.

The long-awaited speech was aimed at a political and US voter audience, not financial markets. The one-hour speech echoed Donald Trump’s inaugural address, had a familiar “America first” theme but disappointed market-wise due to the lack of detail. President Trump outlined his priorities (rebuild infrastructure, repeal and replace Obamacare, increase defence spending, enforce immigration laws).

Further, he announced major business and personal tax reforms, saying that his teams were working on a “historic tax reform that will reduce the tax rate on our companies so that they can compete and thrive anywhere and with anyone” and that the tax overhaul would “at the same time provide massive tax relief for the middle class”. The President avoided technical issues (e.g. border-adjusted tax) and did not mention bank regulation. We acknowledge that nothing has really changed this morning in terms of policy impulse.

For us, the main takeaway consists in focusing on incoming (stronger-than-expected) data and the Federal Reserve’s reaction function. We note that nine Fed members, including Chair Yellen and Vice-chair Fischer, are scheduled to speak in the next three days and will therefore be able to influence market expectations ahead of the next FOMC on March 15. Even before Donald Trump gave his address, the usually dovish 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”.