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Macroeconomics

17 June 2019

NO PLACE TO HIDE FOR THE FEDERAL OPEN MARKET COMMITTEE  

It could be money time in the US this week.

The Fed is holding its Federal Open Market Committee (FOMC) and the number one topic will doubtless be the much discussed dot plot. Voting members will have to say where they see future interest rates. Currently, the interest rate markets are discounting roughly three rate cuts over the next 18 months and a reduction of 50bps over the remainder of this year. True or false? The FOMC will have to come clean, there is no place to hide. But the markets might be expecting too much. Only last week, the retail sales data came in rather strong, hinting at consumption growth close to 4% for the second quarter. That might very well translate into a second quarter GDP growth figure north of 2%. Recently, market pundits had been pointing at growth in the vicinity of 1.5% for this period. Could the Fed forget about the recent weaker jobs data and focus more on the strong set of retail sales figures? We will know soon enough.

Also this week, but only by Friday, fresh PMI data will be released on both sides of the Atlantic. It will be a first gauge for economic activity in June. Some see better activity in the eurozone. Perhaps. And what about the US and how is manufacturing activity evolving?

Lots of questions, but one thing is for sure: ‘if in next year’s presidential election, Trump does not get re-elected, an epic market crash is to be unleashed.’ That was the message from President Trump over the weekend. The US President is kicking off his electoral campaign in Florida this week and the message is quite clear. Change the President and calamity awaits.

The question is whether the choice for president really matters for the outlook of the US economy for the next five years. Fiscal stimulus has been very pro-cyclical and debt levels have skyrocketed. Besides, one of the major promises yet to be fulfilled by President Trump is infrastructure works. While not being aligned regarding the projects, Democrats are also in favour of infrastructure spending. This will obviously only exacerbate the deficit. By 2021, the major topic of discussion in the US could become debt. The weight of debt servicing will quickly increase to very high levels and if and when finally the economy slows, markets will focus on the public and corporate debt levels. With the bulk of corporate debt being BBB-rated, little slowdown is needed to push it into the junk category. Needless to say that this could have a negative feedback loop into the economy. Beyond, but possibly even before the 2020 elections, the US economy could enter more difficult waters where it is anything but plain sailing.

But this is still some time away. One thing is for sure, with his electoral campaign starting by midweek, we can expect many more tweets from President Trump.