US Macro
US Bank Deposits > Loans
2-May-2023. Trochę więcej o „uciekających” depozytach z banków amerykańskich. Od 2009 roku depozyty zaczęły rosnąć zdecydowanie szybciej niż kredyty (wykres 1). Historycznie (dane dostępne od 1973 roku) depozyty przewyższały kredyty o kilkaset mld USD (do 2008), ale w 2021 roku różnica wyniosła ponad 7000 mld USD (wykres 2). Taki przyrost depozytów ponad kredyty bardzo ładnie koreluje ze wzrostem bilansu FED-u (wykres 3). Odpływ depozytów rozpoczął się na początku 2022 roku (od kiedy FED zaczął podwyżki) i to głównie z dużych banków. Spadek depozytów w małych bankach rozpoczął się dopiero po 9 marca br. (wykres 4). Odpływ depozytów będzie trwał dalej, gdyż nie dają konkurencyjnego oprocentowania, poza tym dochodzi „kryzys zaufania” do mniejszych banków. Depozytów jest ich zdecydowanie więcej niż kredytów (kreacja pieniądza "nie dotarła" do realnej gospodarki). Te nadwyżkowe depozyty „nie stanowiły problemu” dopóki stopy były na poziomie zera.
US GDP cyclical components
28-Jul-2023. We tend to spend less of our total budget on durable goods and residential investments (which are the most cyclical components of GDP) when expecting trouble ahead or simply when we “can afford less”. That could be a good macro, sort of, leading indicator of a cycle. I mean macro one, so don’t try to time the market with it. The latest data on GDP for Q2 in the US show how much less was spent in Q2 on durable goods and residential investment as a share of total GDP. The combined share dropped a bit from 12,37% in Q1 to 12,20% in Q2. So this is another (at least from a historical perspective) indicator of the slowly approaching recession.. although a decrease of as much as 1.2 percentage points is still needed for the share of these expenses in GDP to only equal the pre-pandemic state, which may take some time ...
US consumer spending
17-Aug-2023. What is happening to the American consumer … being the main driver of GDP growth in Q3 2023..? Let's look at the data, but with no judgmental adjustments... Such data are: (i) official GDP data from Q2 2023, and (ii) Atlanta FED model projections for Q3 2023 (quoted from www.atlantafed.org: "the Atlanta Fed GDPNow forecast is a model projection not subject to judgmental adjustments "). Consumer spending (PCE) is expected to increase in real terms by 4.8% in Q3 2023 (or +170 billion USD chained 2012 dollars). This is the strongest percentage increase since Covid (see chart). In Q2 2023 real PCE amounted to USD 14,419 billion, of which USD 8,940 billion was PCE Services and USD 5,615 billion was PCE Goods. In Q3 2023, real PCE Services are expected to grow by 3.70% (+USD 82 billion) and PCE Goods by 7.03% (+USD 96 billion). So the main driver of growth in Q3 is spending on Goods* - which is odd in terms of a standard recession where the drop in PCE Goods is the main contributor to the overall decline in consumer spending (see chart). * PCE Goods are Durable Goods (Motor vehicles and parts, Furnishings and durable household equipment, Recreational goods and vehicles, Other durable goods) and Nondurable goods (Food and beverages purchased for off-premises consumption, Clothing and footwear, Gasoline and other energy goods, Other nondurable goods).
US GDP nowcast +5.76%
17-Aug-2023. US GDP: +5.76% ! According to the Atlanta FED GDPNow model (which is quite accurate), US GDP will grow by as much as 5.76% in Q3. After yesterday's data (retail sales) it was consumer that drove GDP growth (increase in PCE contribution from 2.17% to 2.99%; and GDPI* from 1.37% to 1.49%), today's data on industrial production and housing starts increased mainly Residentials' contribution (from -0.02% to +0.42%) and again consumer (PCE Services contribution from 1.42% to 1.70%). Attached are 3 graphs with the change contribution to the GDP growth in Q3: on August 11 (GDP +4.1%), August 15 (GDP +5.03%) and today (GDP +5.76%). *GDPI - Gross Domestic Private Investments (pl. Krajowe Inwestycje Prywatne Brutto)
residential & govt spending
18-Aug-2023. US GDP Q3 2023 Forecast – part 2. In addition to the American consumer, the increase in the GDP forecast in Q3 2023 is also due to Residential Investment, which in Q3 grows 11.4% (after the publication of Housing Start for July in the amount of 1452 thousand units), before the publication of Housing Starts the forecast was -0.5%. A large contribution to GDP growth in Q3 is also government spending, which increases in Q3 +2.53% (in Q2 the increase was +2.58%) - so here there are no major changes in the trend. Summing up, the forecast of GDP growth in Q3 of 5.8% is mainly: - US consumer: PCE Services +3.70% in Q3 (+1.70% contribution to GDP growth) - US consumer: PCE Goods +7.03% in Q3 (+1.59% contribution to GDP growth) - Residential Investment +11.36% in Q3 (+0.42% contribution to GDP growth) - Government +2.53% in Q3 (+0.45% contribution to GDP growth) - Change in inventories +USD 59.3 billion in Q3 (+1.13% contribution to GDP growth) Aktywuj, aby wyświetlić większe zdjęcie,
CPI vs federal govt spending
23-Oct-2023. CPI vs government spending. Part 2. Since 1929, we have had three waves of increases in US government spending, which have contributed in varying degrees to rising inflation: 1) 1940-45, war expenses, increase in government spending from 9% to 45% of GDP, peak inflation 14.6% (average annual), 2) Years 1965-1982, increase in spending from 16% to 22% of GDP, started with the increase in social spending in the second half of the 1960s and the financing of the Vietnam War (peak inflation 13.6%), 3) 2020 – increase from 21% to 31% (peak inflation 8%). The growth in government spending can be looked at from two sides: to what extent it is pro-cyclical and to what extent anti-cyclical. The increase in spending after the 2008 GFC crisis was largely countercyclical (so less impact on inflation). However, today we know that the increase in spending in 2020 was largely pro-cyclical (i.e. had a stronger impact on inflation). Just as an increase in war-related spending can also be classified as "pro-cyclical" - that is, not due to a recession/slowdown (when higher government spending is more needed to be counter-cyclical).
GDP nowcast (15-Nov-2023)
16-Nov-2023. US Q4 2023 GDP tracker now at +2,20% After yesterday's retail sales data, the Q4 Atlanta GDP tracker was raised a little bit to 2.20% (form 2.05%, consensus of analysts' expectations of GDP growth in Q4 is +0.7%). US October Retail Sales fell 0.1% (exp. -0.3%), with the prior revised up to +0.9% from +0.7%. However, the control group, which feeds into the GDP, was in line with expectations at 0.2% with the prior revised up to 0.7% from 0.6%. As a result, the forecast for growth in PCE consumer spending in Q4 slightly increased from 2.54% to 2.68% in Q4. The consumer is still doing very well (although in Q3 his real spending increased by 3.99%). According to the inventory change forecast, it subtracts as much as 43 bps from the Q4 GDP growth, which means that the “actual increase” of GDP (final sales) in Q4 is +2.64%.
US deficit (Oct-2023)
16-Nov-2023. US Deficit. Yesterday we got the latest data on the revenues, expenses and deficit of the American government in October 2023. If we relate the level of spending to inflation, the current level is consistent with inflation of about 3% - see chart 1. So today's expected inflation reading for X of 3.3% YoY would be consistent with the level of government spending. In October 2023: 1) total receipts amounted to $403.4 billion; +26.6% YoY, +$84.8 billion YoY, and 16.4% (12-month rolling) of nominal GDP (was 16.1% in September 2023), chart 2 2) total outlays amounted to $470.0 billion; +15.7% YoY, +$63.6 billion YoY, and 22.4% (12-month rolling) of nominal GDP (was 22.2% in September 2023), chart 3 3) deficit $66.6 billion; -24.2% YoY, -$21.2 billion YoY, and 6.06% (12-month rolling) of nominal GDP (it was 6.14% in September 2023), chart 4 Historically speaking, spending should fall to 20% of nominal GDP (as before Covid), then from a historical perspective it would be consistent with an inflation level of 2% and below.
GDP nowcast (13-Dec-2023)
15-Dec-2023. A perfect time for the FED's pivot: Q4 GDP nowcast jump by 1.66 points to 2.61% The Atlanta GDP model on December 14 showed GDP growth in Q4 2023 at +2.61%. The previous publication on December 7 indicated an increase of only +1.25%. Figure 1. What happened? Mainly strong labor market report for November 2023 (released on December 8), as well as Retail Sales (December 14). Figure 2 shows the contributions to GDP growth in Q4 2023 sequentially on all model dates from December 7 to December 14. The American consumer, i.e. PCE (Personal Consumption Expenditure) contribution increased from 1.32% (on December 7) to 2.02% (December 14). GDPI stands for "Gross Domestic Private Investments".
Reverse Repo(Jan-2024)
15-Jan-2024. The Reserve Repo. There are high chances that the FED will not only start cutting interest rates in March this year, but may also start QT (quantitative tightening) tapering in March, or even end QT. This would be additional support for my “late-cycle deflationary goldilocks” scenario: rate cuts and end of QT. Why would the Fed end QT? … The Reverse Repo (“RRP”) which is slowly approaching zero. RRP generally supplies the financial system with liquidity, including the efficient functioning of the treasury bond market, but also, for example, financing the leverage of hedge funds. We had a similar situation in September 2019, when the FED not only ended QT, but also started a cycle of rate cuts. The RRP as of January 12 was only USD 603 billion (Figure 1). Last weekend, Dallas Fed Lorie Logan said "In my view, we should slow the pace of runoff as ON RRP balances approach a low level." Just look at the difference between loans and deposits (Figure 2). The "printed money" under QE generally does not reach the real economy (through loans), but "looks for its place" in the financial markets.
US Q4-2023 GDP Review
27-Jan-2024. US GDP Q4-2023 +3.3%. US GDP grew +3.3% in Q4-2023 (Wall Street expected +2.0% and the Atlanta Nowcast model +2.4%). 3.3% consists of (contribution to the change, main series): PCE +1.91 pp; GDPI +0.38pp; Net Export +0.43 pp; Government +0.56 pp. PCE = Personal Consumption Expenditures. GDPI = Gross Domestic Private Investments. Quarterly change (annual rate) of main series: PCE +2.84%; GDPI +4.60%; Exports +6.28%; Imports +1.86%; Government +3.27%. Annual change of main series: GDP +3.11%; PCE +2.63%; GDPI +4.60%; Exports +2.07%; Imports -0.17%; Government +4.30%. But the most interesting part is to look at the most cyclical, or "leading" data series. These include Private Residential Investments and PCE Durable Goods. The share of this spending in total GDP has practically declined before each recession. In today's cycle, the share of Private Residential Investments in GDP (nominal dollars) decreased from Q2-2021 (8.84%) to Q4-2023 (7.91%), Figure 1. In today's cycle, the share of PCE Durable Goods in GDP (nominal dollars) decreased from Q1-2022 (4.87%) to Q2-2023 (3.89%). The last two quarters here we have a rebound to 3.94% in Q4 2023. See Figure 2. If we add up these two series, we will get a pretty good leading indicator... see Figure 3. On this chart I have also marked the last 3 soft landing cases from 1997, 1995 and 1986... According to history, we are headed for recession in the current cycle. Although in 1967 we had a false signal when the share in GDP dropped by 2.1 percentage points - and there was no recession. The current decline is 1.75 percentage points.
US Deficit vs Inflation
13-Mar-2024. Inflation & Federal Deficit. Yesterday we got US inflation data, but also the US government's spending/deficit for February. Historically, US government spending (as a % of nominal GDP) correlates strongly with inflation (especially if spending spikes for any legitimate reason, be it crisis, war, pandemic, etc.). The problem is when the justified reason no longer exists and expenses do not want to return to the levels before this reason appeared (this is also the situation today). Core inflation turned out to be slightly above expectations and we had an appropriate reaction on rates/bond market, where yields increased by approximately 6 bps (to 4.15-4.16% in the case of 10y UST). On the side of US spending and deficit, not much changed in February. While nominal spending/deficit is generally growing like a weed, nominal GDP has also been growing significantly recently. As a result, spending and deficit as a % of GDP changed little in February 2024. For the calculations, I assumed that nominal US GDP will grow by 1.05% in Q1 (based on the real GDP growth according to the Atlanta FED GDP tracker of 0.63% Q/Q and assuming that GDP implicit price deflator will be the same as in Q4 2023 (+0.42% Q/Q). Feb-2024 Total Federal Outlays was $567.4 billion (+8.2% YoY), as a % of GDP it's 24.11% (Feb-2023 as a % of GDP was 23.48%). Feb-2024 Federal Deficit was $296.3 billion (12.9% YoY), as a % of GDP it's 12.59% (Feb-2023 as a % of GDP was 11.74%). On the 12-month rolling basis: Feb-2024 Total Federal Outlays $6.36 trillion (-1.33% YoY), as a % of GDP it’s 22.53%. Feb-2024 Federal Deficit $1.80 trillion (+11.0% YoY), as a % of GDP it’s 6.38%. Figure 1 shows the US federal deficit as a % of GDP, interestingly the rules changed in 2016 when the deficit began to grow during the economic expansion. Figure 2 shows US federal outlays and receipts as a percentage of GDP, here from September 2023 it is more or less stable and there is no increase... Figure 3 shows US federal outlays against the inflation Y/Y rate. Conclusions: (1) do not count on a decline in spending this year to pre-pandemic levels (yet, as can be seen in Figure 2, receipts are already at pre-pandemic levels), (2) as a result do not count on inflation decline from today’s 3% Y/Y to 2% Y/Y, ceteris paribus. Bonus chart: Figure 4 – Shelter (and rent) Inflation Series Y/Y vs Home Price Index Y/Y (16-month lead).
US Stagflation Risk
15-Mar-2024. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably… More inflation? Less Growth? Then it probably is stagflation… At least this is the data we got yesterday: hot PPI inflation and cold Retail Sales spending. As a result, yesterday the yields of 10-year treasury bonds increased significantly, but at the same time the forecast of GDP growth in Q1 2024 decreased meaningfully - see Figure 1. This relationship suggests declines in yields, not increases - but yesterday inflation clearly prevailed... Figure 2 shows a second version of the same chart. Table 1 details the change in GDP forecast according to the Atlanta tracker model. The model update on March 14 got only two data: Producer Price Index & Retail Trade. Interestingly, in the current inflationary environment, consumers spend more on services (PCE Services - Figure 3) and less on PCE Goods. The PCE Goods growth forecast after yesterday's data is currently negative (Figure 4, see blue arrows). Figure 5 shows the change in PCE spending versus the 10-year Treasury bond yield.
US deficit vs employment
8-May-2024. US Deficit vs. Full Employment. I just listened to an interview with Stanley Druckenmiller on CNBC and Stan made an insightful comment about the high spending of the US government, that the spending is going to crowd out US innovation spending that would otherwise have taken place... amen to that... The latest data on the deficit is for March this year, when in the March deficit amounted to $236 billion, and on the basis of 12-month rolling it was $1.66 trillion - which if we divide by the current nominal GDP from Q1 2024 will give us a level of 5.87% of GDP - in fact… the lowest data point in 15 months... see Figure 1. Interestingly, already in the years 2016-2020, the rule of falling deficit level during economic expansion (when the labor market was moving towards full employment) was broken - see Figure 1, blue arrows. Stanley also said that deficit levels like today are unheard of in a full employment situation - and indeed current unemployment levels even suggest a budget surplus... see Figure 2.
GDPNow tracker
5-Jun-2024. US GDP tracker strongly down. It is interesting how quickly recent macro data slowed down economic growth in the US. It is best to look at the Atlanta FED GDP Now model, whose GDP growth forecast in Q2 2024 dropped in two weeks from 4.17% (May 14) to 1.85% (June 3). Consumer PCE spending slowed from 3.94% to 1.75%. PCE Goods dropped from 4.22% to 0.73%. PCE Services dropped to 2.25% (even from 5.24% in April). However, GPDI has not changed so much, except for Residential, which is now declining at a rate of -4.36% (it was +14% in April). Attached are some charts: Figure 1 – GDP tracker vs 10Y yield Figure 2, 3 and 4 – PCE trackers Figure 5 – GDPI, Figure 6 – Residential Figure 7 – contributions to GDP Q2 growth (as of 3-Jun-2023).
CBO June 2024 projections
23-Jun-2024. CBO: taxes flat, spending up! On June 18, we got the latest CBO (Congressional Budget Office) update to the Budget and Economic Outlook for the years 2024 to 2034. Now CBO forecasts US fiscal 2024 federal deficit at USD 1.915tln which is up USD 408bln from the February forecast (USD 1.507tln). The main reasons for the deficit increase by 27.1% are: foreign military aid, student loans, the Federal Deposit Insurance Corporation's slower recovery of payments made in response to bank failures, higher outlays for Medicaid and other increases in discretionary spending. Figure 1 shows revenues, outlays and deficits as % of nominal GDP, including CBO's latest projections. Figure 2 shows the change in CBO's forecast for renewues and outlays. In 2024-34, total outlays are up to USD 2,597tln. Total renenues are up by USD 121 billion. It's obvious... increasing taxes is not popular... unlike increasing spending... makes sense! As a result, the deficit increases by USD 2,475tn in the years 2024-34. Figure 3 shows this as a % of nominal GDP. Such an increase in spending is not good for future inflation, ceteris paribus. We are moving from the norm of 20% of GDP spending (2014-2019) to a new level of 24% in 2025-2035. See Figure 4 (see blue circle with dashed line). So you just have to get used to the new normal. But there are two main risks: (i) even higher spending in the next CBO forecasts, and (ii) even higher spending in the next recession. CBO doesn't predict a recession in the next 10 years, but we might... see Figure 5.
A surprise with suprise indicies
30-Jun-2024. A surprise with Surprise Indices? It's quite interesting that the US Bloomberg ECO Surprise Index is currently at its lowest level since 2016. See Figure 1. The economic surprise index measures economic data coming in above or below consensus (median) estimates. Figure 2 also shows a narrower variant of the “Economic Growth” index, which has also fallen significantly recently! In other words, in the last two months, analysts have been most negatively surprised by data (below their own forecasts) since 2016! See Figure 3. Figure 4 also presents an inflation surprise index. Surprise indices may in some periods correlate well with the overall condition of the economy, or even have leading properties (but this certainly does not apply to the entire period). Do the last 2 months of significant decline indicate a weaker macro and upcoming interest rate cuts? This definitely must be taken into account. Figure 5 shows the surprise indexes against the Fed Funds Rate and 10y UST yield. Currently, we have a situation somewhat similar to 2018/2019, when surprise indices led interest rate cuts by the FED, as well as falling 10Y yields. Figure 6 shows index of inflation surprises against the annual change in CPI. The surprise index seems to be ahead of inflation changes... and the last decline in the index in June 2024 is mainly due to the release of surprisingly and unexpectedly soft CPI and PPI for May.
Housing Weakness Jul-2024
17-Aug-2024. Pockets of weakness. The Q3 GDP growth forecast according to the Atlanta FED GDP tracker dropped from 3% to 2% in two days. Weak data on industrial production was accompanied by weak data from the real estate market. Housing Starts fell 6.8% in July to 1,238 million (exp. 1.33 million, prev. 1.329 million). This lowered the GDP forecast to 1.99% from 2.44% - with Residential Investment subtracting as much as 44bps from GDP. See Figure 1 and Table 1. The decline in Residential Investment is now -11.7% SAAR in Q3 2024. See Figure 2. This decline in Residential Investment in Q3 also means a decline in the real value of Residential Investment in Q3 by $24 billion - see Figure 3. Figure 4 shows Housing Starts from 2004 and Figure 5 from 1959. Single-family starts tumbled 14.1% to 851k and multi-family soared 14.5% to 387k – see Figure 6 (multi-family are 2 or more units). What caused such a large decline in Housing starts? Some point to Hurricane Beryl, but the market weakness was not limited only to the south of the country. High interest rates may end up having a greater impact on this market. Bonus chart – all 3 main series from the residential market (permits, starts, units completed) run more or less together in cycles.. – see Figure 7.
Slowing Labor Market?
8-Sep-2024. Does current growth support slowing labor market? One of the factors influencing future employment growth is current economic growth. If entrepreneurs see growing demand (e.g. growing GDP) – they will try to reflect this in their decisions regarding employment (i.e. increase in employment/or no layoffs). And GDP growth is still doing very well – see Figure 1. Probably the most important for the companies’ decisions regarding employment are the last two quarters (of GDP growth), i.e. in Q1 2024 we had only +1.41%, but in Q2 2024 as much as +2.95% - which is quite healthy growth. Figures 2 and 3 show similar charts for the previous two recessions. The latest reading of the Atlanta GDPNow model indicates a GDP growth in Q3 2024 of +2.47% - see Figure 4. The American consumer is still doing great... its real spending in Q3 is expected to increase by 3.52% - see Figure 5. Interestingly, consumer spending after the publication of the August employment data (published on September 6th) increased the model's Q3 PCE growth forecast from 3.10% to 3.52%! - see Table 1. All in all, the current real GDP growth (including the forecast for Q3) and the current real PCE growth (including the forecast for Q3) do not confirm a (future) slowdown in the labor market. Of course, this is just one of many factors that influence the actual decisions regarding the future increase/decrease in employment.
GDP > 3% in Q4 2024
28-Sep-2024. US GDP above 3% Yesterday we got the next reading of the GDP forecast according to the Atlanta FED model. In Q3 2024, GDP is to grow by 3.08% (after GDP growth in Q2 of 2.99%) - such growth does not indicate the risk of recession in the near future. See Figure 1 and 2. However, spending of the American consumer turned out to be softer in August (Personal Income and Outlays report), hence the decrease in the PCE forecast for Q3 from 3.66% to 3.28% - see Figure 3. GDP growth in Q3 of 3.08% SAAR would mean GDP growth YoY in Q3 of 2.72%. This looks interesting against the background of the last median forecast of GDP growth in Q4 2024 according to FOMC members at the level of only 2.0%. See Figure 4 and 5. For Q4 YoY GDP to fall to 2%, we need a decline in Q4 GDP calculated as SAAR to only 0.32%! See Figure 6. From today's perspective, this is unlikely and the Fed will probably have to raise its GDP growth forecast at its meeting on December 18, 2024. All in all, the forecast of Q3 GDP growth of +3.08% and PCE growth of +3.28% should be a good premise for the market to price in a soft landing scenario.
The Mighty Consumer!
29-Sep-2024. The Mighty Consumer! On September 25, we got the latest data on the debt burden of the American consumer (i.e. household debt service ratio - DSR). DSR is the ratio of total required household debt payments to total disposable income. Interestingly, despite the Fed rate rising above 5%, the average (counting from the first rate hike) DSR is practically lower than before Covid. The average DSR from 2015 to 2019 was 11.7%, while the average DSR from Q1-2022 was 11.0% - see Figure 1. No wonder the American consumer does not intend to reduce their spending.. despite the FED’s rate increase to 5%! Figure 2 shows a longer period.. since 1980. It is clearly visible that in previous cycles, the rising Fed rate caused an increase in DSR. Figure 3 shows that in both … the rate hiking cycle in 2015-2018 and 2022-2024 ... DSR did not increase! The DSR is divided into two parts. The mortgage DSR (total quarterly required mortgage payments divided by total quarterly disposable personal income) and the consumer DSR (total quarterly scheduled consumer debt payments divided by total quarterly disposable personal income). The mortgage DSR and the consumer DSR sum to the DSR. See Figure 4. If rising rates do not translate into rising DSR.. then the US economy remains stronger and the market is more likely to play a soft landing scenario. This was the case in 2019, when the S&P500 increased by about 19% from August 2019 (we were already after the first rate cut by the Fed) to February 2020!
Trump Trade 2.0
10-Nov-2024. Trump (Trade) 2.0 3 days after the US election, small US companies are doing best (+6.14% in three days), of course they have the opportunity to benefit the most from Trump's policies.. And gold is doing the worst (-2.14%).. just maybe because Trump prefers cryptocurrencies... Bitcoin is +9.82% in 3 days. European (-1.40%) and Chinese (-1.33%) stocks are also doing poorly. Europe and China may face some economic problems due to Trump's trade policy... The difference between American companies (+3.70%, S&P500) and non-American companies (-1.05%, MSCI ACWI ex-US) is also interesting! Below are the returns of selected indices from November 5 (close) to November 8 (close): Russell 2000: +6.14% Mag7 (market cap weights): +4.98% Nasdaq100: +4.40% S&P500: +3.68% (see Figure 1) iShares Core S&P500 ETF total return: +3.70% iShares MSCI ACWI ex US ETF total return: -1.05% (see Figure 2) --- WIG30: +2.80% WIG20USD: +1.78% Hang Seng: -1.33% (see Figure 3) --- Nikkei 225: +2.67% Euro Stoxx 50: -1.40% (see Figure 4) --- Bitcoin: +9.82% Gold: -2.14% (see Figure 5 and 6)
Trump Trade or Roaring 20's
10-Nov-2024. Roaring 20's or Trump 2.0? 2023 and 2024 are truly exceptional years! Why? In 2023 S&P500 was up 24.33%. In 2024, so far so good.. +25.70%. However, the last time the S&P500 was up over 20% two years in a row was in 1998. And before that... we have to go all the way back to 1955! Aside from the exceptional 1990's.. S&P500 also achieved such high returns twice in the 1920's... during the Roaring 20's! See Figure 1. Trump 2.0 - Why is 2024 similar to 2019? Trump was also president in 2019. In 2019, Powell started a cycle of interest rate cuts. On November 8, 2019, the S&P500 was up 23.39% year to date. On November 8, 2024, the S&P500 is up +25.70% YTD - see Figure 2. In 2019, the S&P500 closed the year up +28.88% and continued to rise through February 19, 2020.
Trade Wars 2.0
24-Nov-2024. Trade Wars 2.0 – Are You Ready? A new Trump presidency will likely mean another global round of trade wars. While higher tariffs raise the prices of goods and services – the end result for the entire economy is usually the opposite… deflationary. Tariffs act as an additional tax, so it is rather difficult to have higher inflation – unless new money creation is added to the system. The final effect of the trade war depends on the reaction to higher tariffs of many entities: 1) How will producers, exporters, importers, retailers and also final consumers react, 2) Will they increase purchases of goods before the introduction of tariffs, how big will be the substitution effect (purchases of substitute goods not covered by tariffs), 3) Will other countries also react with retaliatory tariffs, how will capital markets react (negative wealth effect etc.), 4) How much will domestic industries "protected" by tariffs raise prices, how much will international trade suffer, how will direct investment be redirected, etc. In 2018, the United States imposed tariffs on $283 billion of US imports in 2018, with rates ranging between 10 and 50 percent. Tit-for-tat retaliatory tariffs (from China, The European Union, Mexico, Russia, and Turkey) averaged 16 percent on approximately $121 billion of US exports in 2018 (source: “The Impact of the 2018 Tariffs on Prices and Welfare,” Mary Amiti, Stephen J. Redding, and David E. Weinstein, Journal of Economic Perspectives—Volume 33). But after two years, all major measures of US inflation were lower than in 2018—see Figure 1. Figure 2 shows the same measures of inflation over the longer term, including genuine inflation in 2022!
Trade Wars vs S&P500
26-Nov-2024. Has the Trade War 2.0 just started? While on Monday the markets were counting on some kind of "grown-up tariff war" - after nominating a market-friendly hedge fund manager Scott Bessent as Treasury Secretary, a day later the markets may be disappointed with the statements of the president-elect. D. Trump: “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders. This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!” And on China: “I have had many talks with China about the massive amounts of drugs, in particular Fentanyl, being sent into the United States – But to no avail. (…) Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs”. We've been through this before... On May 30, 2019, Trump announced a 5% tariff on all Mexican imports - if Mexico didn’t stop the flow of illegal immigrants into the US. See Figure 1. But he called off those tariffs a few days later... after signing an agreement with Mexico to prevent illegal immigration... Interestingly, Trump announced new tariffs on Mexico … on the same day (i.e. May 30, 2019) that the Trump administration took a formal step to kickstart an approval process of the United States Mexico Canada Agreement (USMCA) sending a formal letter to Congress! Figure 2 presents the same stock indices but just showing the percentage change... during the entire trade war 1.0. All in all, the trade war 2.0 has a good chance of happening in 2025. For example, DB assumes in its base case for 2025: „On trade, we assume a 10 percentage point increase in the tariff rate on imports from China in H1 (ratcheting up a further 10pp in H2) and an equalisation of tariff rates on motor vehicles with Europe. The forecast also assumes a 5% universal baseline tariff, though that is more likely to be implemented late 2025/early 2026”.
