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Trump’s Powell Broadside Knocks The Greenback

Published 21/08/2018, 08:29
Updated 03/08/2021, 16:15

Two months before he was elected President of the United States in September 2016, Donald Trump said Fed chair Janet Yellen should be 'ashamed of herself' for keeping interest rates low and creating a 'false stock market' saying that the central bank’s policies were hurting savers and pension plans.

It therefore seems rather strange that he should now be criticising the current incumbent, and his choice as Fed chair for not keeping rates low, and pushing rates higher.

The US President’s comments last month, and which he repeated last night, was that he was 'not thrilled' with Jerome Powell and the Federal Reserve, for its consistent policy of raising interest rates, saying he should be given more help by the Fed.

Unfortunately for the President that’s not how it works under the Fed’s mandate and while he has pledged to continue to criticise the Fed if it continues to raise rates, his criticism while unwelcome and unusual for a US President, is unlikely to stop the Fed from hiking again next month, or later this year.

If anything the President’s comments in driving down the US dollar could well make it easier for the Fed to hike rates, as they could mitigate the upside in the US dollar, as a strong currency tends to have a deflationary effect.

In any case, even before yesterday’s comments by the President, there was already a debate going on in the markets, as to the wisdom of the Fed going too quickly where rates are concerned. The crisis in emerging markets, concerns about trade, as well as geopolitics, were causing some to question as to whether the Fed should look at revising its guidance.

The worry is that the President’s interventions will make it much harder to have that debate, without accusations that the Fed is being manipulated.

With an economy set to continue to expand at around 4% the Fed does need to be acutely aware of the possibility that the economy may well overheat as a result of the fiscal stimulus that is still helping juice the current economic expansion.

Someone should tell President Trump that the central bank in hiking rates is a vote of confidence in the US economy, and thus his stewardship of it, and will also help those savers he claimed to be so worried about in 2016. He may then look at it through a slightly different lens. Of course he could well be also getting his excuses in early in the event we start to see a slowdown over the next few quarters, as he blames the Fed for slowing the economy.

The wider point is that markets may be overanalysing yesterday’s comments, given that Trump also criticised the Chinese central bank as well as the European Central Bank for keeping their currencies artificially weak, and what he said isn’t exactly new. It’s also something that central banks have been doing for years with rather mixed success with the Bank of Japan being a case in point.

President Trump also indicated that he wasn’t expecting too much from this week’s China trade talks.

As a result of yesterdays’ repeated comments from the President the US dollar slipped back pushing the euro back above the 1.1500 level for the first time in ten days. Treasury yields on the other hand, already near session lows before Trump’s comments, rebounded slightly.

While currency markets have reacted to the President’s comments, equity markets have shrugged them off, with US markets closing near to record highs, while Asia also had a positive session.

European markets have opened rather mixed this morning after yesterday’s positive session though it should also be acknowledged they have underperformed in recent weeks, and are still close to three month lows.

On the companies front UK house builder Persimmon (LON:PSN) shares have opened higher after reporting first half trading that saw a 13% rise in profits to £513.8m and a 5% rise in revenues to £1.84bn. Forward sales also appear to look healthy, despite the slowdown being seen in the housing market. The company may well be being helped by the fact that the company have little exposure in London, and fairly limited exposure to the South East housing market, where the main slowdown in house price growth is happening.

Oil field services group John Wood Group (LON:WG) managed to post a decent performance in the first six months of this year, not altogether surprising given the recovery in oil and gas markets. Revenues saw an improvement of 13% on the previous year, though after one off costs the company reported a loss of $52m.

BHP Billiton (LON:BLT) shares also opened lower despite paying a record dividend. While pre-tax profits rose to $14.8bn and revenues rose by 20%, net profit was hit by $5.2bn worth of charges related to the sale of shale gas fields as a result of US tax changes.

Dow Jones is expected to open 23 points higher at 25,781

S&P 500 is expected to open 1.5 points higher at 2,858.5

DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.

No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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