Trump speech: the policy mix about to change

Analysts at Natixis explains that during his address to Congress, President Trump stuck to his most recent proposals as he confirmed that the top priorities of the new administration are: increase infrastructure spending, implement a “big” tax cut for corporates and a tax relief for middle incomes, revamp trade relationships, toughen the stance on immigration, build the wall at the Mexican border and repeal the Affordable Care Act.

Key Quotes

“Yet, the speech wasn’t helpful in determining what could be the timing and magnitude of the expected fiscal stimulus, which ultimately will be key in order for the market to validate its upbeat expectations.”

“In short, little new information provided in the President’s address to the Congress. Uncertainty remains high on the timing and magnitude of tax cuts and the measures the administration could use to offset the resulting loss of revenues. We are now waiting for the White House to release more details on its budget proposals but as we move on closer to Q2, the likelihood of having a fiscal push to growth this year is diminishing.”

“There being no clouds on the horizon, will the Federal Reserve seize this window of opportunity? As regards the global environment, there is no Chinese risk, no emerging risk, while the European political risk is some way off and Brexit is seen more as a domestic risk than a systemic risk...”

“Furthermore, the macroeconomic situation in the US also makes for a less accommodating monetary policy. When all is said and done, the employment data (to be confirmed next week, but there are no reasons why figures should be poor) indicates that the economy is at full employment, while growth is holding up, the latest figures confirming growth exceeds revised potential (durable goods orders published on Monday were good). In short, from a monetary standpoint, and as repeated time and time again by FOMC members, a further three interest rate hikes this year seem reasonable.”

“As regards obstacles to a further monetary tightening, i.e. economic slowdown, excessive appreciation of the US dollar, uncertainties over Donald Trump’s stimulus package and systemic market risks (Frexit), all these hurdles, save the last, have been cleared. Come May, the French elections will be in full swing. March and June look the most likely for the next rate hike.”

“On our part, we remain of the view that it will be June, this being the simplest option for the Federal Reserve... pending any light that might be shed at the end of the week.”

“On Friday, there will be speeches by Fed Chair Janet Yellen and by Fed Vice-Chairman Stanley Fischer, which could well be the last opportunity (given the blackout period) to signal whether a hike in the Fed Funds rate is likely in a fortnight’s time.”

“All in all, policy mix is changing, some more activism seems about to arrive out of Trump administration. Less accommodation is needed on the monetary side. Next meetings from the Fed are definitely live…”