If the stock market’s reaction to Donald Trump’s address to congress is a guide, it would appear favourable. The Dow Jones climbed 300 points on Wednesday to close above 21000 for the first time in history. A commitment to a trillion dollars of infrastructure spending, was well received. US bond prices, which have been rising recently despite the improving outlook, fell however, the yield on the Ten-year treasury currently remains below where they were in mid-December. Those investors who have looked to defy this rally, continue to face the pain. If the markets are moving irrationally, the saying goes, that can carry on longer than those who try to defy it can stay solvent.
His speech was considered by political commentators to be more conciliatory in nature compared to some of his earlier ones. The speech did little in the way to deter those who belief that Mr Trump has a protectionist agenda during his presidency.
Members of the Federal Reserve now appear prepared to raise interest rates at the next meeting on March the 15th. The bond market is now pricing an almost near certainty that the Fed will act in March, and a more than 50% chance it will fulfil its ambition of raising three times this year. The 15th of March is likely to be an eventful day. Aside from the probable rise in Fed fund rates, it is the day Theresa May has marked to trigger article 50, officially starting the process of Brexit. It is also the date of the Dutch general election. The polls are suggesting another support for the Party for Freedom, signifying another rise in popularist voting.
Next week we have the Spring Budget, after that will be the next meeting of the Bank of England’s rate setting committee meeting on the 16th of March. Is it possible the Bank of England could follow the Feds move and likewise raise interest rates? We continue feel there is a real risk Mark Carney and his fellow members of the MPC have made a serious policy decision error last August, by further cutting interest rates.
The process to negotiate our exit from Europe will begin shortly in earnest. With this increased uncertainty, this is possibly the time the economy is at a greater risk from slowing, not the point the vote was made. If the Federal Reserve do fulfil their aim to raise rates three times this year, this will give them leverage to act by lowering them again at some point in the future when the US economy slows. Mark Carney, with hindsight may well reflect that he acted in haste and will end repenting at leisure. If he too had been patient last August, he may now be able to follow the Fed’s lead and looked to tighten monetary policy, whilst the UK economy remained robust. This would have given him room to manoeuvre during the Brexit negotiations if the need came.