All eyes will be on Mr Trump’s speech to Congress tomorrow. Commodity prices have dropped following suggestions that the President’s infrastructure spending pledge will be delayed. The reflation trade has again been called into question. However, the rally in equities is not contingent upon the prospect of a large fiscal stimulus: the US economy was gathering momentum prior to Mr Trump’s election. There is little sign that it will stall, even with a delay to infrastructure spending.
Indeed, the 4-week average for initial jobless claims fell to 241k in the week ending February 18th, the lowest since July 21st 1973. Housing is benefitting from the strong labour market. The more prescient indicators suggest that the rise in property prices is accelerating. Given the very low level of inventories, any modest relaxation in lending criteria will push house prices up sharply. This in turn will feed into higher consumer spending.
In mitigation, the wage data was softer in January. The disruptive impact of tech on the labour market should not be underestimated. Nevertheless, FOMC members have acknowledged the asymmetric risks associated with the current level of interest rates. The implied probability of a March rate hike remains far too low.
Summary
- Claims drop to new multi-decade lows
- Rising house prices to boost consumer spending
- March hike could push dollar to new highs, but will be capped by strong data in the Eurozone, Japan and China
