It is perhaps ironic. In a week that saw clear evidence inflation is tracking well below target, and may be falling again, Treasury yields have jumped. The external risks have, of course, been uppermost in the minds of stock market investors. Cutting a deal with China makes a lot of sense electorally, especially with the impeachment proceedings underway.
Mr Trump may start to realise that the economy is indeed in ‘great shape’, and could provide the best, smoothest path to re-election. Unemployment falling to historic lows with nothing to worry about on inflation, is potentially a very positive combination for equities. As noted last week, stock markets could rise to new highs through 2020.
The benign trend in services inflation remains a defining feature of the current economic expansion. Excluding medical care, energy & shelter, the services CPI was up 0.57% y/y in September. It has only been lower than this once – in June 2017.
The Fed could cut if it so wanted. This optionality provides a real floor for equities. It is up to Mr Trump and how far he wants to push China. Cutting a trade deal would improve his chances of re-election no end.
