Games of chicken can turn foul

Year on year growth hit 3% according to the latest revision of the second quarter estimate for the US economy. The reaction from the US bond market, almost negligible, suggesting that the bond market remains sceptical this will be enough to make the Fed move again this year on interest rates. The impact of the terrible floods in Houston and the missile test from North Korea that saw US 10-year treasury yields fall to a low from the start of the year. Equity markets were slightly more encouraged as US equities posted a four-day winning streak. Even though it must be said the gains were meagre.

The US president is once again blowing the trumpet for tax reforms and appears prepared to play a game of chicken with Congress to get his way. Tax reforms and the building of a wall across Mexico are becoming intertwined. Mr Trump has threatened to shut the government down at the end of the month if he does not get the backing he needs for a wall. He also needs the support of at last 8 democrats to meet his desire to reduce the tax rates. Mr Trump does seem to be hoping that both the wall and tax reforms are popular policies amongst the voting public. By forcing these issues his aim, should he fail, is to make congress look like the bad guys in the public eye.

Games of chicken with a countries finances could have dire consequences should one of the two sides not pull back into their own lane and let the other pass. The Washington Post also took up this point about the game of chicken, pointing out that at some point someone could miscalculate and the government hits its debt limit and defaults.

The strength of the euro has impacted the performance of the leading European bourses since May. The eurofirst FTSE 300 falling about 6pct from its peak in mid-May, despite a positive earnings season. Mario Draghi has commented on concerns that the euros strength, could tensions rise again in Europe as inflation pressures between the German economy and the rest of Europe continue to widen? On Thursday, the latest release from the euro area reported that core inflation, that excludes food and oil prices, remains flat at 1.2%. In contrast German inflation climbed to 1.8%, this was above economist’s forecasts. Germany are likely to once again become more vocal about when the ECB should at least look to reduce its bond purchase program as well as looking at negative interest rate policy.

Next week the ECB meet for their monthly rate setting meeting, the press will have their questions at the ready looking to dig deeper into the accompanying statement for any further clues. Usually when the euro starts to strengthen too much for the ECB’s liking, some eurozone sabre rattling takes place. In the past it’s been amongst others Greek debt, Germany threatening the legality of the bond purchase program and Italian banks to name but a few. That usually does the trick to weaken the euro once again.

 

Posted on September 1, 2017 .