The dollar has snapped a three-day losing streak and global markets are retracing their steps after the attempted assassination of former president Donald Trump at a campaign event in Pennsylvania over the weekend. Treasury yields are up, equity futures are heading toward a positive open, oil prices are up, and the Mexican peso is down a little over 1 percent as we go to print.
Most observers believe that the attempt – bolstered by a dramatic photo of a bloodied Trump triumphantly holding his fist aloft – will translate into a bump in the polls, making it more likely that he and his fellow Republicans sweep both houses of Congress in November’s presidential election. Odds extracted from the PredictIt prediction market* show the Republican odds of winning have risen to 66 percent from 60 percent on Friday, with the Democrats languishing near 37 percent – down sharply from 49 percent just before Joe Biden’s disastrous performance in the presidential debate at the end of June.
Investors think a less constrained Trump administration could double down on campaign pledges to restrict immigration, lower income taxes, and raise tariffs across the board – a policy mix that might raise US inflation and interest rates, worsen the country’s fiscal position, and damage global trade flows, even as it supports a stronger dollar and higher valuations for large corporates. The greenback could move higher yet as retail traders enter the fray after the North American open this morning.
But we would caution hedgers against overreacting.
Donald Trump could yet snatch defeat from the jaws of victory. As others have pointed out, Teddy Roosevelt managed to lose an election just three weeks after being shot in October 1912, and Reagan’s approval rating quickly reverted lower after John Hinckley took a potshot at him in 1981. At the best of times, US politics is difficult to predict, but this isn’t the best of times, and the path forward remains impossible to extrapolate.
And changes in Federal Reserve expectations could prove more important. The US economy has been exhibiting signs of slowing momentum for months, but policymakers have been hamstrung by still-stubborn inflation rates. In our view, that changed last week, when the pace of price increases slowed for a third consecutive month, putting the core personal consumption expenditures index on course toward printing near the 2.5 percent mark in June – close enough, for most intents and purposes, to the Fed’s 2-percent target.
Bloomberg’s surprise indices, which measure realised data relative to consensus market expectations, are now moving in sync, with inflation, labour market, and overall growth indicators all slowing at the same time. Tomorrow’s retail sales data could impact rates curves, but when Jerome Powell sits down for an interview with Carlyle Group co-founder David Rubenstein at the Economic Club of Washington just after noon today, he may suggest that the central bank is closer to achieving the confidence needed to begin easing policy, shifting the market focus toward the second half of the Fed’s dual mandate. Simply put, many of the factors that have been taking some air out of the dollar’s ascendance remain intact, despite the shock and magnitude of the weekend’s events.
Japan’s yen is handing back some of its gains, but is holding near a one-month high after last week’s presumed intervention effort. Market operations data suggests that the authorities may have gone on a circa-$20 billion buying spree after Thursday’s US consumer inflation print triggered a narrowing in cross-Pacific rate spreads, but declining expectations for a rate hike at the Bank of Japan’s end-of-month meeting are putting downward pressure on the currency. Overnight index swaps are putting sub-50-percent odds on a move at the meeting as domestic data continues to come in on the weaker side of consensus.
The British pound is treading water ahead of inflation numbers on Wednesday and wage growth data on Thursday. Declines in headline and core inflation measures might bolster odds on a rate cut at the Bank of England’s August meeting, but another unexpectedly-strong increase in services costs could underline stubbornly-strong demand pressures and fold into last week’s warning from Chief Economist Huw Pill, who warned against expecting price growth to slow in a linear manner. Market expectations for the autumn seem to indicate that the Bank will wait till the Fed is clearly ready to move before beginning an aggressive easing cycle, with two rate cuts priced in between September and December.
Tomorrow morning’s euro-area bank lending survey could keep interest rate expectations relatively firm. No credible forecaster expects the European Central Bank to deliver a rate cut at this week’s meeting, and evidence of a slowing in the bloc’s credit contraction should give policymakers room to wait for more data before telegraphing the next move. Financial conditions in the euro area have improved relative to the levels seen when the central bank was raising rates aggressively, but tight lending standards and weak demand are pointing to a distinctly lacklustre recovery ahead. The euro’s performance still seems more likely to be determined by events in the US than at home.
And here in Canada – where potential assassins are taken out by a guy who wears a bicorn hat and carries a mace – investors will get the last major data releases before the central bank’s July 24 decision. This morning’s Bank of Canada survey data should show price expectations continuing to come down, but we’ll also be looking to see whether the improvement in business and consumer sentiment seen in the first quarter has continued. If optimism returns in a sustained way (particularly in household views on the real estate market) rate differentials could tighten slightly, helping bolster the Canadian dollar into tomorrow’s inflation report – which should show the Bank’s preferred core measures decelerating at a very gradual pace.
*I apologise for using such a cliched chart here – I’m sure every sell-side research note includes something similar this morning, but clean, real-time data on political developments is difficult to come by.