US Fiscal Speculation Lies Ahead

Daily Analysis - 28/02/2017

Presidential Address to Congress Expected to Outline Budgetary Measures and Tax Reform Details

Though few details have been forthcoming on US President Donald Trump’s proposed policy measures relating to taxes, trade, spending, and budgetary reform, an early leak of a plan to raise defense spending while staying budget neutral by slashing spending in other areas was well received by equity markets.

Trump Budgetary Measures Push Stocks to New Highs

In keeping with his campaign promises, US President Donald Trump is forging ahead with plans to slash budgets at several government departments while raising defense spending. According to early leaks ahead of Trump’s remarks set to be delivered during the Asian session, defense spending is set to jump by $54 billion after cuts are made to the State Department, EPA, and other non-defense agencies within the US government.

While details on proposed tax reform and fiscal stimulus measures remaining notably absent from the conversation, financial markets are expecting further details to be unveiled during the upcoming policy speech for Congress. In the meantime, whispers of spending and inflation, positive measures were enough to drive stock benchmarks to fresh intraday records, with Dow futures extending the prior session’s modest gains.

Durable Goods Orders Foreshadow More Tepid US Outlook

US orders for durable goods, typically a strong indicator of business activity considering it highlights longer-term investments by companies, rose during the latest reading driven predominantly by new transportation orders. According to the US Census Bureau, headline durable goods orders rose by 1.80% month over month through the end of January compared to the -0.80% contraction reported back in December.

Transportation equipment orders rose by 6.00% for the period, accounting for the big reversal with respect to the report from a month prior. However, stripping away the more volatile transportation component, the core durable goods figure contracted, falling -0.20% for the period, underlining weaker than expected business activity. After rising to the highest point since the US Presidential election on Monday on the back of dollar weakness and a poor report, gold is back on the retreat as the dollar rebounds, pushing prices back towards the $1250 level.

French Inflation Gains Taper

The spectacular climb in French inflationary metrics over the last few months appears to have hit a roadblock after the advance reading of February headline consumer prices came in lower than anticipated. Compared to forecasts of a 1.70%, the preliminary inflation reading came in at 1.20% on an annualized basis, also printing below the prior month’s figure of 1.30%. While there is still a revision ahead, it could indicate that the gains in energy prices are gradually fading from inflation figures, especially when taken in the context of the Euro Area Harmonised Index of Consumer Prices which retreated from 1.60% to 1.40% during January.

In a positive sign, growth during the fourth quarter matched an earlier estimate of 0.40%, with one final revision due near the end of March. After closing flat on Monday, the French CAC 40 remains under modest pressure at the open of European trade.

Japanese Industrial Production Slips Back Into Negative Territory

After positive readings for four of the last five months, Japanese industrial production slipped back into the first contraction since July. Advance output figures fell by -0.80% for the month of January compared to expectations of 0.30% growth and a 0.70% increase reported a month earlier. Although annualized growth for the measure remained positive, coming in at 3.20%, January saw declines across the board, with transportation equipment production dragging the figure lower after falling by -4.70%.

Other areas of softness included chemicals output and general business machinery. However, in a positive sign for the economy, retail activity picked up modestly, rising to 1.00% growth year over year, beating estimates of 0.90% and the 0.60% expansionary print recorded in December. Nonetheless, the Yen continues to treat bad news as good news with the currency appreciating and USDJPY modestly lower after the announcement.