U.S. inflation remains above target

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Worlds apart: Trump challenges Denmark and Iran

Source: LSEG Datastream

For another week, U.S. President Donald Trump’s rhetoric dominated the news, with some headlines explicitly moving markets while others were more subtle. However, there can be no question that the generally chaotic tone and the challenging of norms are causing investors to change the way they deploy capital.

Defence stocks remain in focus and were jostled by two key themes.

Firstly, President Trump has threatened the Iranian regime with military action if its efforts to repress local protests are not tempered, a requirement the regime will find difficult to meet.

Secondly, Trump has continued with assertive rhetoric and candour over his now, very public, desire to assimilate Greenland into the U.S., and his refusal to rule out the use of force. While the prospect of this leading directly to significant military action seems remote, it does emphasise the new vulnerability NATO members are likely to feel over the protection which the alliance had previously afforded them. The logical conclusion is that countries need to develop and invest in their own military capabilities.

President Trump’s recent emphasis on military-focused measures has followed last year’s focus on economic measures, most notably tariffs. However, many of those measures are now in doubt. So far, the Supreme Court of the United States (SCOTUS) has been expected to produce an opinion on this topic twice this year, but as yet, no opinion has been forthcoming.

We have a better idea over the timing of President Trump’s assault on monetary policy because the Court is due to hear oral arguments in the case of Lisa Cook, the Federal Reserve (the Fed) governor, whom President Trump would like to dismiss.

The case is over whether the discrepancies on her mortgage application were an oversight or a fraud, but the reason for bringing the case to SCOTUS is that the president would like to influence monetary policy by placing his own nominees on the Federal Open Markets Committee, which sets interest rates.

Wednesday’s oral arguments should give an indication of whether SCOTUS is planning to rule on the individual case or the broader issue of whether the president has the power to fire members of the Fed’s board. If the court tackles the wider case and rules in the president’s favour, it’ll have significant impact on monetary policy, effectively handing him de facto control. It would mean lower interest rates and a weaker dollar.

U.S. inflation remains higher than desired

Source: LSEG Datastream

Until inflation hits target, the Fed will react to economic data, such as last week’s U.S. inflation report.

The president’s preference for lower interest rates was helped by the unexpectedly weak U.S. core Consumer Price Index (CPI) inflation. While lower than expected, inflation remains slightly above target. There remains some evidence of tariffs affecting inflation, but it isn’t vast and it’s tended to be overshadowed by weakness in other categories like used cars this month. Shelter costs should keep overall inflation restrained but core services remain a little high.

This makes the case for further interest rate cuts difficult to make right now, and so rates are expected to remain on hold until the summer (June or July). Much will depend upon the outlook for the labour market, which for now appears to be treading water.

Positive results from U.S. banks

Source: LSEG Datastream

Economic data can only tell you so much. At the start of the new earnings season, a lot of focus is on the banks to see what they can tell us about their own businesses and the state of the broader economy. Last year was a great one for banks, with the interest rate environment broadly supportive, companies doing large deals, a big increase in corporate borrowing, and plenty of market upheaval to trade through, even if the final quarter saw some moderation in these trends.

According to the banks, the economy is in good shape, with consumers spending and businesses investing. The short-term outlook remains positive even while the protective institutions of the U.S. economy and global community come under pressure from a disruptive president.

Coming up

• Legal wrangles: SCOTUS is due to hear evidence on whether President Trump can fire Fed Governor Lisa Cook, and could rule on the legality of the ‘Liberation Day’ tariffs.
• UK outlook: The inflation rate is expected to edge higher in the short term, but hopes are that it will fall over the medium term.
• Earnings season continues: The second week of earnings season sees a broader focus extending beyond just the banks.

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