- Donald Trump and the path of the USD are difficult to analyse, as conflicting forces are pushing in different directions.
- Ultimately if Trump wanted a weak dollar there are things he could do.
Macroeconomics
Snippets on the big picture.
U.S. Fiscal Position
- U.S. fiscal deficit stands out vs. other advanced countries.
- Source.
Weak Demand?
- Despite a continued PMI below 50, mentions of weak demand on company conference calls (as of 17th October) are falling.
Rising Term Premium
- Despite the yield whipsaw last week, 10-year rates were starting to price in a term premium, likely due to worries about the US fiscal position under Trump.
- Source.
Globalization’s Resiliance is Partly Tax
- “Globalization has also persisted because the Trump-Ryan reforms to the U.S. corporate tax system, implemented through the Tax Cuts and Jobs Act (TCJA), did not end tax-related incentives for U.S. firms to offshore production and profits.“
- A reversal of the latter could be an issue for big pharma and semiconductor firms.
- China’s export-led growth strategy is the other, admittedly larger, driver.
- Blog post here and full paper here.
High Yield Credit Spreads
- Historic low.
- Source: Top Down Charts.
Consumer Price Index
- “Of all the economic statistics produced by the U.S. federal government, none has a direct impact on the lives of everyday Americans quite like the Consumer Price Index.”
US R&D Spending is Surging
- In the last decade, spending on R&D in the U.S. has surged.
- Almost entirely driven by businesses.
- More than offsetting the multi-decade decline of government spending on R&D.
- Source.
China and the US
Job Growth Breadth
- Is increasingly narrow.
- Source: KKR.
Economic View is Key for Markets
- Plenty of charts around showing that, if there is no recession after a rate cut, the market is up on a 12-month view.
- If there is, the market could be down. The median decline is 24%.
Restaurant Spending
- Some distortion post-COVID could be causing some reverberations, but it looks fairly weak.
CEO Tenure
- Consumer/retail CEO tenure is surprisingly low compared to other sectors.
- Source.
Economics Data Quality
Mortgage Rates
- US 30-year fixed mortgage rates (orange line, bankrate data) are coming down, pushed by falling 30-year treasury rates (blue line).
- Interestingly, the spread to 30-year US treasuries (white line) went up a lot this rate cycle and remains (2.67%) well above the historic average (1.3%). Normalisation here could be a big boost.
S&P Returns Post Rate Cuts
- 12-month returns are largely positive except in 07/01.
How Japan Transformed
- At the end of the 19th century “Japan transformed from a relatively poor, predominantly agricultural economy specialized in the exports of unprocessed, primary products to an economy specialized in the export of manufactures in under fifteen years.“
- How did it achieve such a feat?
- “In a remarkable new paper, Juhász, Sakabe, and Weinstein show how the key to this transformation was a massive effort to translate and codify technical information in the Japanese language. This state-led initiative made cutting-edge industrial knowledge accessible to Japanese entrepreneurs and workers in a way that was unparalleled among non-Western countries at the time.“
- Source.
Households want to Move
- This suggests pent-up demand once mortgage rates fall.
- Source: Apollo US Housing Slide Deck.
Myth of Deglobalization
- Deglobalization is a narrative that is prevailing in the press.
- Brad Setser argues that this isn’t the case.
- “China’s surplus in manufacturing has risen as much relative to world GDP in the last few years as it did during the first China shock following the country’s accession to the WTO“
- A big driver of this is the export of Chinese manufacturing into Vietnam and other countries for final export.
- “the reality is more complex: put plainly, it is impossible for a global economy characterized by a large U.S. deficit on one side and a large Chinese surplus on the other to truly fragment.“
- Corporate tax avoidance also boosts globalization – “American multinationals now often produce abroad to book large profits in offshore tax havens“.
Reacceleration?
- Rate cuts lead the cycle turning.
- Source.
