Intraday Market Thoughts

Growth & Politics: Inseparable?

by Adam Button
Jan 3, 2017 23:54

The line in time between hope becoming reality is a blurry one but it's where US markets find themselves early in 2017. The Australian dollar was the top performer in the first real trading day of the year while the euro lagged. Chinese sentiment data is due later as we continue to keep a close eye on Chinese bonds.

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Growth & Politics: Inseparable? - Sectors 2016 (Chart 1)

The big market moves since the US election are undoubtedly based on some mixture of hope and expectations that Trump and the new Congress will jumpstart US growth via legislation, regulation and/or spending.

At some point, that hope will need to be replaced by actions and results. Early returns are good. Economic data has been strong and that continued Tuesday with US Nov construction spending  up 0.9% compared to the +0.5% consensus. The ISM manufacturing index also rose to 54.7 compared to 53.6 expected in another sign of a pickup.

Hope itself can be self-sustaining to a point. It encourages optimism, confidence and risk taking; three things that are the genesis of economic growth.

One of the  quickest ways to undo that progress is political change doesn't come and the hope comes crashing down. That could be because Congress and the White House isn't as united as they may seem. Bets on a dysfunctional US political system for the past 10 years have been well-placed.

Today was the first day of the new Congress and the first priority in the House was watering down the independent ethics watchdog. That's a bizarre priority and the backlash went all the way to the top as Trump tweeted his displeasure. The changes were scrapped.

In a sense, that's heartening but it's also a sign that Trump and Congress aren't on the same page. A big risk in the next four years is that the Republican party isn't as united and focused as markets have led us to believe.

Or maybe – as is usually the case – the shock that hits markets will be one that few expect. That's why we're watching China so closely. The 50 year bond was halted limit down briefly yesterday and, as Ashraf explained earlier, yields are approaching levels that spelled trouble in the past.

Up next we will watch the Westpac consumer sentiment data for China at 0145 GMT. The prior reading was 114.9.


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