In his first address to both houses of Congress, on 28 February, Mr Trump did not, as investors had expected, provide either further details on his stimulus programme or a timeline. Instead, he went over the measures he has already taken and those he plans to take (see table). While he did not stray from his initial promises – and therefore reinforced his message – the lack of detail revealed just how complex his intended reforms are and how far behind he is in implementing them (e.g. the Border Tax Adjustment). This is in keeping with our scenario, as we do not expect there to be any impact from Mr Trump's programme until the end of 2017. Since he did not mention how his projects would be financed, fears of a growing deficit remain. The president only underscored the debt accumulated over the past eight years, without giving any indication of his own stance on the issue. Finally, with expectations running high, investors reacted well to the president's speech, in which he expressed his desire for harmony, stability and unity both within the United States and with partner countries.
It was not so much Mr Trump's address that caught investors' attention last week, but the prospect of an imminent rate hike by the Federal Reserve. Recent economic data have nevertheless been mixed: growth in new durable goods orders excluding transportation slowed in January (see chart), and personal consumption expenditures increased by 2.75%, down from a 3% rise in December (see graph). Furthermore, the year-over-year increase in construction spending also slowed from 5.2% in December to 3.1% in January, and the trade deficit was up by 7.6% over the same period. Overall, these statistics are in keeping with our forecast of slow growth in the first quarter.
However, leading business and consumer confidence indicators rose sharply. The ISM's manufacturing and non-manufacturing indices went from, respectively, 56.0 and 56.5 in January to 57.7 and 57.6 in February. The Conference Board Consumer Confidence Index rose from 111.6 in January to 114.8 in February and is now at its highest level since July 2001 (see chart).
This upswing in confidence indicators led several members of the Fed to hint that a rate hike could be on the cards at the next meeting, on 15 March. On 28 February, New York Federal Reserve President William Dudley argued that, given the sharp upturn in consumer and business confidence, the solid financial markets and the fiscal stimulus he expected, "the case for monetary policy tightening has become a lot more compelling". And on 3 March, Janet Yellen stated: "At our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”. Following these speeches, expectations that the fed funds rate would be raised by 25bp to 1.00% at the 15 March meeting rose sharply: fed funds futures, which had set the probability of a March rate hike at 40% on 24 February, pointed to a probability of 94% by closing on Friday 3 March.
Analysis and implications:
- Following the hawkish tone of the addresses by William Dudley and Janet Yellen, we have modified our fed funds forecast and now expect it to rise by 25bp to 1.00% at the Fed's next meeting on 15 March (rather than in June 2017 as we had previously anticipated).
- However, we still think that the rise in the dollar and in long-term bond yields will weigh on the US economy in the first half of 2017. And we still do not expect the effects of Mr Trump's fiscal stimulus measures to be felt before the end of 2017. As a result, we have not changed our forecast of only two rate hikes by the Fed in 2017, which would bring the fed funds rate to 1.25%.
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