The Two Weeks That Will Be (15th July 2024)
1. The US
Hollywood could not have written a more astonishing script for an electoral battle between two well-known pensioners whose combined age is two-thirds that of the United States of America itself. With all the impeachments, porn stars, felonies, dementia, constitutional chicanery and now assassination attempts, the public has almost certainly decided who the victor will be: the man with the bloodied face punching the air rather than the man stumbling over steps and words. Make of The Donald what you will but financial markets must now focus on what comes from a Trump Presidency, most likely alongside Republican control of the House and Senate.
Reflationary policies are on the cards which would lead to steeper yield curves, higher equity markets and a stronger dollar.
Beyond that, there is the tail risk of an unshackled, quixotic and auto-sanctified Trump deliberately pushing constitutional boundaries. He will only have four years and will not want to waste them. The WSJ referred in April to a 10 page document drafted by an inner circle of Trump advisors stuffed with proposals to blunt the independence of the Fed. The nuclear suggestion that the President should be part of the interest rate setting process is unlikely to clear any separation-of-powers hurdles but demotion of Chair Powell will be discussed. Powell’s term as Chair certainly won’t be renewed once it ends in 2026. More technical, and therefore less likely to draw outrage, is the proposal to (as the WSJ puts it) have ‘a more muscular role for the Treasury Department in overseeing any emergency lending programs that are done jointly with the Fed‘.
This would be significant. The backstop provided by the Fed’s alphabet soup of actions during the pandemic saved financial markets, and the world, from an even more devastating downturn. If the backstop could not be relied upon in future then risk premia across the board should rise.
One of Trump’s first term picks for the Fed, Christopher Waller, speaks Wednesday on “the Economic Outlook”. The latest from the Fed’s Beige Book comes on the same day. Trump’s other successful nominee, Michelle Bowman speaks Friday on “Accountability and Reform” at the Dallas Fed conference on “Exploring Conventional Bank Funding Regimes in an Unconventional World”.
The world is about to get a whole lot more unconventional.
2. The ECB
…which is particularly the case in France. The inconclusive election result will push the constitution to its limit. A system devised to concentrate power in the President, albeit with constructive tension with the Prime Minister if they should come from another party, falls apart when the President and PM are both weakened by a lack of electoral mandate. Trying to build a coalition from the ground up is not only unusual in France – it is anathema to its very political culture.
The electoral system forces a second-round run off choice precisely in order that one person or party is the winner. With Le Pen winning the biggest vote share at 37% but coming third in terms of seats for each parliamentary grouping, the chat is very much amongst the pigeons. Because she hasn’t actually come third. Her party won the biggest number of seats. None of the nine parties that make up the new NFP grouping, nor the five parties in Macron’s Ensemble centrist group, came close to that.
Not that you can quite tell, because the results aren’t yet fully clear. Those groups are already shifting. The groups are not parties. MPs are peeling away into new groupings. L’Après have defected from Melenchon’s La France Insoumise. The traditional right-wing Les Republicains are now “The Republican Right”. Even Macron’s group is splintering with one of his early supporters, Sacha Houlie, saying he will not sit in the Renaissance group, whilst the previous PM Gabriel Attal managed to get himself elected leader of the group even though he has resigned as PM.
Clear? Clair comme de la boue.
What is clear is that the market's becalmed summertime low-risk proclivities will not hold.
France is facing debt-deficit dynamics that would challenge even a stable government with a strong leader and a solid mandate. France’s own Court of Auditors just published a report flashing major warning signals on “The Situation and Outlook For the Public Finances”. In short they conclude that 2023 was a very bad year, the 2024 budget path is at risk and long-term goals are unrealistic.
This isn’t just a problem for France. The EU has had to launch the Excessive Deficit Procedure against them because they are so far from the fiscal rules policing the Stability and Growth Pact which underpins the Euro. The European Commission warned its “debt sustainability analysis indicates high risk over the medium term”. France’s Court of Auditors concluded that ‘France would benefit from taking the lead and clearly stating, on the basis of more realistic forecasts and credible reforms, how it intends to regain control of its public finances and honour its European commitments’.
Step forward the ECB who meet on Thursday. A heavily sourced but not always “on the record” slew of quotes peppered an FT article headlined ‘French fiscal doubts strengthen ECB reluctance to repeat rate cut signal’. One ECB rate-setter told them ‘If you know anything about French politics, you know there is no constituency for fiscal consolidation”. Another who ‘declined to be quoted during the “quiet period” in the week before a policy decision’ said ‘You cannot ask smaller countries to respect the EU fiscal rules if the larger countries are not doing so…If they don’t it will be a problem. It makes our job more difficult, because it could push up inflation”. For balance, a dove told the FT that they were worried about the “very sluggish recovery… what if inflation falls below our 2% target next year?“.
In short, the ECB does not want to commit. It really really does not want to commit to anything, not when one of the founding members of the EU, the Eurozone and the ECB is now only months, if not weeks, away from demonstrating that it cannot be governed.
3. The UK
The EU and the US must be gazing jealously at the UK. A new government with a huge majority and a mandate for change. Nobody will care about the inflation number on Wednesday or jobs data on Thursday or Consumer Confidence on Friday because Sir Keir and Securonomics will sort it. Expectations are low but that’s just how any new leader would like it. Better to under-promise and over-deliver.
We will see more of what Starmer is made of with the State Opening of Parliament and the King’s Speech on Wednesday. His government has already stated that departments are working on ‘more than 35 bills’ … ‘that will be built on a bedrock of economic security, to enable growth that will improve the prosperity of our country and the living standards of working people‘. They are, as that press release emphasises, rolling up their sleeves and getting to work.
4. Earnings
Markets seem not to care one jot of these geopolitical fripperies. Who cares if a constitutional crisis is brewing once more in the Eurozone? Or the policies that could be enacted by the return of a divisive President to the US who now believes he was saved by divine intervention? Or that interest rates really aren’t going to come down as much as expected and that the big piles of debt taken on in the pandemic will come home to roost?
Doesn’t matter if Nvidia keeps going up, does it?
Indicators of financial market stress are at all-time lows according to BofA:
We are entering earnings season which might just re-awaken reality. Bank of America on Tuesday, Netflix on Thursday, and Alphabet and Tesla on Tuesday 23rd July will be the ones to watch.
