What is the economic state of the state of the union?

Posted by: Paul Donovan

05 Feb 2019
  • Today US President Trump delivers the state of the union address. This is an opportunity for sweeping political statements. It is unlikely that markets are going to care about most of these. The areas of most concern to investors are well known. Trade tariffs have become a tax on equity markets. All things considered equity markets would prefer it if they were not taxed – so anything that hints at a beautiful chocolate cake moment with Chinese President Xi would be well received. There are also the collective issues of government shutdowns, debt ceiling debates and budgets. Markets get nervous about government shutdowns and potential US defaults. The Federal Reserve is unlikely to change policy if the US government is doing an impression of anarchic chaos. So hints as to the President's thinking on these areas may matter to investors.
  • Other things generally do not bother markets. The Mueller investigation, the investigation into the Trump inauguration committee and so forth would only matter if they affected the President's ability to get things done in Washington. Market expectations for that are now relatively low, and unlikely to change. It is too soon for markets or indeed for voters to be concentrating on the impact on the 2020 presidential election. 
  • In the glittering wonder that is the euro we have December retail sales data. Obviously French consumer spending was a little constrained by having to push past rioters to get to the shops, but overall domestic demand in the euro area has held up well of late. The variable in determining euro area growth rates this year is whether international investment spending can revive. This is important to euro area exports, and could stabilise or revive that economic impulse depending on actions in other markets.
  • The UK BRC retail sales figures were stronger than expected in January, but the accuracy of this as an assessment of UK consumption is questioned. There is nothing interesting to say about the EU-UK divorce process. Otherwise with Asia off and a data calendar devoid of any really useful information, markets are left without economic direction. 

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