"and as the toes of the feet were part of iron, and part of clay, so the kingdom shall be partly strong, and partly broken" (Daniel 2:41-43)
Week ending Mar 25, 2017
THE FIRST REAL TEST OF PRESIDENT TRUMP
The Freedom Caucus, a rebellious faction within the Republican House, dealt a mind numbing body blow to President Trump. By blocking the hastily convened legislation to repeal and replace Obamacare, put forth by speaker Paul Ryan and backed by Donald Trump, the group has provided a painful reminder to President Trump of the pitfalls in negotiating politics inside the beltway.
In spite of the President adhering to his style of politics and delivering an ultimatum for a do or die vote the group stuck to its guns and forced the speaker to postpone the legislation. Needless to say, this now raises a lot of doubts about the ability of the Republican party to deliver on the pro-growth agenda, especially of tax reform as the failed legislative proposal was looking to save billions of dollars through Medicaid cut backs.
Without the billions of dollars of alleged savings, what will pay for the tax reform and cuts ? The passage of comprehensive tax reform will be that much more difficult to pass as the Freedom Caucus having taken the measure of the President will try and oppose the Border Adjustment Tax as well. And we know that President Trump likes the B.A.T as it supposedly will generate trillion dollars in government revenues. Once again party politics could easily push tax reform into 2018. A lot will depend on Trump and his ability to negotiate a deal. And right now it's not looking good.
And his voter base is surely asking the question - does he have feet of clay ?
And the avid investor is asking - what does it mean for the markets ?
Given the markets had prematurely rallied in anticipation of the President's ambitious agenda of repeal and replace, tax reform, de-regulation and infrastructure spending stimulus, the markets could pause and digest the ramifications of Friday's defeat. Until some measure of confidence returns in the government's tax reform timeframe we expect the market rally to lose steam, the dollar to continue to weaken and gold to strengthen.
USD Index (Jun 2017) YTD -2.75%
Between a schizophrenic Fed and a fractious Republican establishment threatening the Trump pro-growth agenda the U.S. Dollar looks dangerously poised at an inflexion point after almost two weeks of losses against its counterparts. The embarrassing defeat suffered by President Trump on Friday has raised serious questions about the timing of tax reform, although the Trump administration claims that they have and will move on immediately to tax reform. However, Republican Senator Mike Lee (Utah) said on "Meet the Press" on Sunday that if the Trump administration thinks that they can put health care reform behind and move on they are mistaken. It is very much still in the now. This doesn't augur well for Trump's agenda of getting things done.
Secondly, in spite of the recent rate hike the Fed has done a mediocre job of convincing the markets that they will increase the speed of rate hikes in the coming months. Hawkish rhetoric has been noticeably absent as they are still pointing to just two more rate hikes. In addition, the uncertainty regarding Trump's policies is maybe also preventing an increased hawkish fed rhetoric.
This week more Fed speakers (Evans, Kaplan, George, Yellen, Powell ) are on the docket with speeches and should give clues regarding upcoming Fed thinking. A history of comments from Fed speakers has only, in my opinion, confused the investing populace even more. But on the other hand there is the possibility that they could potentially arrest the downward trajectory of the USD against its counterparts. In addition, the third revision of fourth quarter GDP data and the Fed's favoured inflation gauge the PCE are scheduled for release this week and could potentially provide a bit more substance to the on going rate hike debate.