Markets, politics, trade: Zero sum?

Markets, politics, trade: Zero sum?

The Fed’s new head gets his sea legs; politics in Europe and the U.S. heat up; markets react.

"Some of the headwinds the US economy faced in previous years have turned into tailwinds"
Federal Reserve Chairman Jerome Powell, reporting to Congress

Federal Reserve: Have a seat, Mr. Powell Last week saw new Chairman Jerome Powell’s first appearance before both the House of Representatives (Feb 27) and the Senate (March 1). Coming a mere 15 days after the start of the first equity market correction in over two years, financial markets watched even more closely than usual. Mr. Powell’s prepared remarks were suitably cautious, but the jousting over the future path of rates, the adequacy of the U.S. employment picture, and other regulatory matters, hit a few potholes – mostly because Mr. Powell used different code words than former Chair Janet Yellen to describe policies that are mostly unchanged.

The main differences, at the margin, were about the impact of the recent tax law changes on growth (more positive than Yellen’s last words on the subject) and the tolerance for rapid economic growth (higher than Yellen).

Until Mr. Powell’s new lexicon is accepted, this level of hair-trigger reactivity may continue. Only time will tell how long it lasts.

U.S. trade, Germany, Italy: Politics and poker
President Trump unfurled opinions about trade and tariffs that departed strongly from the existing set of norms for global trade, generating predictable upset and disagreement between winners and losers, both foreign and domestic. Equity markets in most regions reacted negatively, in response to the challenge to their newfound higher earnings expectations. Fixed-income markets reacted as if they had been saved from the possibility of overly positive growth,

Germany faced a day of reckoning on Sunday, with would-be coalition partners SPD (Socialist Democrat Party) voting on the week's platform agreed by Angela Merkel's Christian Democratic Union (CDU). If the vote of the party members doesn’t succeed, it means yet another attempt at reshuffling coalitions – or it could mean referring the election to parliament, with unpredictable results.

Italy had its own general election on Sunday, which has been greeted by financial markets with indifference until Friday – and with some degree of resignation by the disaffected electorate.  Which could be potentially disruptive to financial markets in Europe and elsewhere – given that a low turnout could spell victory for Eurosceptic parties with populist, nativist inclinations.


All data source: Bloomberg, as of Friday March 2, 2018, 3:00 PM ET


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