The U.S. equity markets maintained their gravity defying rises last week as the DJIA, SPX and NASDAQ indices all continued to take out record highs. It’s worth noting that the DJIA finally broke through the 20,000 level in January 2017 and here we are, thirty months later and 27,000 has been breached representing a thirty-five percent rise. The rise in the NASDAQ has been more stunning, the tech-index has risen by circa 60% during the same period with the FAANG stocks accounting for the majority of the growth.
The corporate tax cuts the Trump
administration introduced are the key factors causing such stellar rises due to
increased investment into financial markets in search of dividends and yield,
the market rises are not as a consequence of economic growth. As several major corporate firms in the USA publish
their latest reports and earnings this week it’ll be fascinating to note if
this fiscal stimulus has continued to juice the markets, or if the boost first
noted in the 2018 earnings season is beginning to fade.
The corporate tax rate was lowered
from 35% to 21%, as some related business deductions and credits were also
reduced or completely eliminated. But despite the massive cuts GDP growth has
failed to experience a significant, sustained boost, adding to the criticism
that the tax-cuts were lob-sided as the trickle-down effect appears to be
Although the USA government apparatus
will continually stress the record low unemployment and employment figures as
signs that the USA economy is buoyant, Wall Street has powered ahead whilst
Main Street remains in the doldrums. According to certain data from Pew
Research approximately 40% of USA households can’t lay their hands on circa
$400 for an emergency without resorting to borrowing and approximately 40
million Americans receive food-stamps in order to eat. 17% of American children
live in poverty.
The concern that the supposed economic
boost is contained at elite level and financial markets, could be a factor in
the Fed Chair Jerome Powell’s belief that the USA economy may need monetary
stimulus by way of an interest rate cut in July. During his recent Capitol Hill
testimony he stressed: global trade concerns, weak USA manufacturing growth,
low inflation and weak GDP as reasons to potentially lower the key interest
rate below the current 2.5% level. His remarks caused a further sell-off in the
value of the USA dollar across the board.
On a weekly basis the dollar index,
DXY, is down circa -0.49%, USD/JPY down -0.52% and USD/CHF down -0.76%. Both
EUR/USD and GBP/USD rose by 0.40% in the week up to July 12th, while AUD/USD
rose by 0.63%. FX analysts and traders will carefully monitor U.S. dollar
sentiment this week for further evidence that the FOMC will reduce the main
rate by 0.25% at their July 30-31 meeting.
Other than the latest advanced retail
sales data for the USA and industrial/manufacturing production figures to be
published on Tuesday July 16th, it’s a relatively quiet week for economic
calendar events and data specific to the USA. Several Federal Reserve
Presidents and officials are set to deliver speeches and these will be closely
scrutinised due to the belief that the FOMC are now odds-on to lower the rate
at the end of July.
Monday July 22nd is scheduled to be
the day the Tory party reveals the voting decision by their members to elect
their next leader and the default prime minister of the U.K. The odds are on
the divisive figure of Boris Johnson winning the vote. During the build up this
week the speculation surrounding sterling may increase, as FX market traders
begin to position themselves for the outcome. Assuming Johnson isn’t playing to
their right-wing voters by threatening a no-deal exit by October 31st, then the
predictions for the value of GBP look ominous.
In the event of a no-deal exit certain
analysts at investment banks predict GBP parity with the euro and U.S. dollar
irrespective of any monetary policy adjustments by the ECB and FOMC, as the BoE
are also likely to lower rates to fend of any impending Brexit recession.
Economic calendar events for the U.K. this week includes: employment and
unemployment data, the latest CPI reading, government borrowing statistics and
retail sales. All data prints could alter the value of GDP if the metrics miss
or beat the forecasts by any distance.
Eurozone news this week mainly centres
on CPI figures and various Zew sentiment readings. If the inflation figure
comes in at the Reuters forecast of 1.1% YoY growth when the data is published
on Wednesday July 17th at 10.00am, then speculation could increase that the ECB
has the slack and justification to lower the interest rate in order to
stimulate growth in the bloc. Therefore, the value of the euro might alter
depending on the inflation figure.
Other notable calendar events this
week includes Canada’s CPI which is forecast to fall to 2.0% from 2.4% YoY when
the figure is revealed on Wednesday afternoon, a reading which could increase
speculation that the Bank of Canada could lower the main interest rate.
Japanese CPI is forecast to come in at 0.7% YoY which could (once again) cast
doubts on the effectiveness of the four-arrows Abenomics growth and stimulus