16th June 2017

If there’s one thing we learned from last week’s UK election, it is this. The anti-establishment vote is alive and well. In what was something of a role reversal from 12 months ago, it was Theresa May who this time came unstuck at the hands of a frustrated electorate. Unbelievably, she may just have outdone her predecessor in terms of electoral blunders. What impact this has on the future leadership of the Tory party, Brexit negotiations and even what the UK will look like come March 2019 remain great unknowns. Whatever the outcome the clock is ticking. The further uncertainty this creates for the UK will be most unwelcome and with a weaker GBP contributing to accelerating RPI things are likely to get worse before they get better. The Bank of England are acutely aware of this with 3 members of the MPC this week calling for a rate rise in a bid to stem the slide in the pound.

Never to be outdone, Donald Trump continues to attract headlines for both domestic and international matters. On the home front, it looks for now like he may have survived the scandal involving alleged collusion between the Russians and his 2016 presidential campaign. Whilst it made for good TV, no clear “smoking gun” appears to have emerged from senate hearings involving former FBI Director James Comey or District Attorney Jeff Sessions. Internationally, the prospective US withdrawal from the Paris Accord may have a more lasting and damaging impact. From the global perspective, it has demonstrated Trump’s willingness to abandon leadership on a pressing global issue. Moreover domestically, the move has been widely denounced with several high-profile CEOs publicly displaying their disapproval (Zuckerburg, Immelt, Musk etc). Strained relations with corporate America is certainly not ideal right now, especially as the benefits from ‘Trumpenomics’ remain to be seen.

Away from the world of politics, all eyes were this week on the Federal reserve. With a 25bp hike already priced in, the Fed’s decision to stick to previous forecasts of further rate hikes (including another 25 bps in 2017) caught the eye. So too did confirmation that policymakers expect to begin a programme of “normalising” the bloated $4.5tn balance sheet, beginning with a reduction of principal reinvestments on maturing bonds. What concerns us, and we are not the only ones, is that the Fed might just be tightening into a slowing economic environment. By ignoring a series of weak inflation points, which they have described as “transitory”, the Fed have left themselves little leeway if the data continues to disappoint. The faint murmurs of ‘Fed policy error’ may yet grow louder. Looking beyond headline inflation numbers, we have been highlighting for some time the contraction in commercial and industrial loans, consumer credit and auto loans. Additionally the global credit impulse (a tracking indicator of global credit conditions created by UBS) has been showing signs of contraction, plummeting by some 6 per cent of GDP. These are worrying signs at a time when a tsunami of global liquidity looks to be ending. For now, the bond market offers the loudest dissenting voice to the global reflation story – witness the flattening of the US treasury curve. How long before other markets begin to clear their throats?

Steve O’Hanlon, June 2017


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