NAB Morning Call

Is Trump now a shoo-in for the Presidency?

Monday 15th July 2024

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The assassination attempt against Donald Trump on Saturday is likely to bolster his support, ahead of his GOP official nomination this week. NAB’s Tapas Strickland tells Phil that betting markets have shifted further in favour of a Republican win. So, will we see much market impact as markets re-open today? Markets on Friday were driven by a hjgher than expected PPI read, at odds with the weaker inflation numbers earlier in the week. Phil asks how this has changed market pricing for rate cuts. They also look at Friday’s US banks earnings, China’s trade data over the weekend. Plus, what is the Third Plenum and why should we pay attention to it?

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Duration:: 15m
Broadcast on:: 14 Jul 2024
Audio Format:: mp3

Dramatic scenes from the US over the weekend. Does this mean Donald Trump is now a shoe-in for the presidency and can we expect much or any market reaction to that at all today? Meanwhile, inflation isn't coming down. The PPI numbers in the US took a different direction to the inflation numbers early on the week. We'll also look at bank earnings from Friday, China's trade numbers and a busy week ahead. And what is the third plenum and why we should pay attention to it? It's Monday. It's the 15th of July, 2024. It's the morning call from now. Good morning. Well, at the end of the week we saw the US dollar down a third of 1% on Friday and three quarters of a percent over the week. The Aussie climbed against the falling US dollar on Friday up 0.4% to 67.8 US cents. The euro did the same. The pound rose a bit more up almost 0.6% whilst the yen, which rose quite a lot on Thursday, rose again on Friday up another 0.6%. So over the week it rose more than 1.8%. But of course that is still almost 12% down for the year to date. Despite that big rotation in stocks on Thursday, Friday did see while the rotation continued. But tech was up on the day, the Nasdaq Dow and S&P all up about 0.6% up, 0.8% for the ESX200 of the close on Friday. Even bigger rises for equities in Europe. A big day for the Hang Seng as well. That was up 0.6%. But the Micai down 2.5% and Treasury yields fell on Friday down a few basis points for 10 years whilst yields were rising in Europe. Aussie 10 years fell 5 basis points on Friday to 4.32% a bit lower on futures since then and oil low on Friday about half percent off Brent and WTI. But that was all last week. The world has changed a little over the weekend, hasn't it? That photo of Donald Trump being shielded by security officers whilst fist pumping into the air, the American flag behind him. That was going to be one of the enduring images of our lifetimes, I feel. And it could also greatly increase Donald Trump's chances for the presidency. Just as Ronald Reagan's approval rating increased significantly after he was shot in 1981. But then his Republican support went from 74% to 92%. His support from the Democrats went from 38% to 51%. Now Donald Trump, meanwhile up to this point, has got an approval rating of 44%. So we'll see whether the same thing happens as did in 1981. Now, as Tapa Strickland is with me this morning, so how do you think markets are going to react to this today? It does seem like the chance of another Trump presidency has increased somewhat to the point of almost certainty. Those events were definitely very, very tragic. There's a lot of unanswered questions there. But in terms of how markets are likely to play that, I don't necessarily think they'll react too much with it. But like you're saying in terms of the polls, when you look at betting markets, so the predicted market, for example, which is how many cents you need to put up to get a dollar back, after those tragic events, the Republicans are now at $0.66 and the Democrats are at $0.35. Prior to those weekend events, it was $0.60 for the Republicans and $0.40 for Democrats. So it has at least according to betting markets, swung a little bit further in terms of Republicans gaining the presidency towards end of the year. And this is all coming in the context also that the Republican National Convention also is on this week as well. So that will seal his place, basically, won't it? He'll be the nominee officially this week. Yes, yes. And also importantly, we'll know who the vice president candidate will be. I thought we already know his vice president Trump. I thought we already knew that. So the UK's telegraph over the weekend as well, saying Elon Musk has been putting a sizeable donation to the Trump Fund as well. So a lot of people doing whatever it takes to get him into the White House. I wonder whether this is going to force a move by the Democrats, although Biden has shown no signs of leaving. I wonder, does it make it more likely he's going to leave or more likely that he's going to get set in, I wonder? It's very unclear. And he gave an address to NATO on Friday last week. And betting markets were pretty mixed about whether he would get the Democratic nomination. I guess there's still a lot of water under the bridge to go from here. But either way, you look at it. After the weekend events, there's a greater likelihood of Republicans getting the presidency coming in. Yeah. Well, calling his vice president Trump and getting Zelensky's name wrong, it really didn't help his case at all at the end of the week. Let's look at other numbers then. So all the excitement about the softer CPI read last week and those hoping that would translate into three cuts by the Fed this year. Well, the PPI numbers just aren't playing ball with that. They went the wrong way, didn't they? And of course, these are the numbers that feed into the core PCE read, which is what the Fed uses to gauge inflation. And it's going up, not down. Yeah, the US PPI was very mixed. So definitely on the headline level, it did beat expectations. And so it came in hotter than expected. And you saw headline at 0.2% month a month versus 0.1% expected and core at 0.4 versus 0.2% expected. But importantly, for the Fed's preferred PCE measure of consumer prices, there's only a few components in the PCE that actually, sorry, a few components from the PPI that directly feed into the PCE. So it's still consistent with the core PC printer of around 0.15 to 0.17% month on month. And so that, I think, markets are bad in a relatively positive sign. So post the PPI data, you actually saw yields fall and you saw increase in the probability of Fed rate cuts. So now looking at Fed funds pricing, they're sitting at a cumulative 63.4 basis points of cuts for 2024. And that's up from 61.2 basis points the day prior. And so that effectively means markets are now pricing around a 50% chance of a third rate cut for this year. So I think that's pretty important. And the other thing I just wanted to highlight is that the most recent June FOMC implicitly assumed an average month to month PCE increase of 0.19% in the remaining eight months of the year. With the PCE data we had last month and with the numbers that are likely to print this month, that's going to be printing below that kind of 0.19% level. So it could be that come the September FOMC meeting not only do you likely get a Fed rate cut, we also get a lowering of the core PCE. as well, which will be pretty significant. And if that word occurred, then that would further pay into that view of the prospect of the potential of the third cut by the end of the year. But obviously there's a lot of water to come under the bridge. There's a couple more CPI and PCE prints. It really only takes one or two prints going in the wrong direction. And then Marcus will be moving the other way. But that explains why we saw the rotation in stocks that we talked about on Thursday. And so Friday a little less of that in that, you know, tech stocks bounce back a little bit. But still, you know, the share market is doing well. And then on top of that, we had bank earnings, but they're not so good actually. I mean, expectations seem to have lowered somewhat, don't they? So the signs of that, you know, of a weakening economy. But I guess a weakening economy increases the chances of more rate cuts, and so it goes around. It does. And there was a fairly big rotation as you're saying on Thursday, and that rotation did continue on Friday. So you did see the Russell 2000 up 1.1% on the day, and the S&P 500 is up 0.6. And over the week, the Russell 2000 is up 6% on the week. And you don't see those kind of moves very often. So it does suggest there is a lot of rotation going in under the headline indexes. But just coming back to bank earnings, which you mentioned, you saw the equity price of JP Morgan for 1.2% after it posted a low profit. Wells Fargo tumbled 6% and Citigroup also declined by 1.8%. And just read out a few anecdotes. JP Morgan's credit card said charge offs and loans rose by nearly two thirds from a year earlier. Their CFO did say that rise in part reflected a normalization from years of historically low levels. So I think that's important to note with bank earnings is you're coming from a couple of very good years. So you're starting to get normal normalization is that tightening in policy comes through. More anecdotes of low income consumers sound a shift spending to non-discretionary from discretionary purchases, which obviously we know is a sign of weakness out there. So I think that's really interesting. But even with those anecdotes of softness, you did still see the JP Morgan CEO Jamie Diamond repeat his view that interest rates could wind up saying higher than some economists have forecast. And I was just looking at the Atlanta Fed GDP now estimate for Q2. It's sitting at 2%, which is a touch above where people pick trend growth in the US to be at. And you still have payrolls running around 200,000 a month. So nothing's telling you that the economy is dramatically slowing, but it is telling you that it is slowing. And if your inflation is falling back towards target, then obviously that opens up room. And just one thing I just wanted to highlight though, is at the very bottom end of the distribution, it does seem to suggest spending is being crimped and people are really reacting. So Pepsi reported last week, and they said sales volumes fell 4% from a year earlier in its Frito-Lay North America business and 3% for North America beverages. So I think that's pretty important. The lower income consumer who's felt the most pain from the inflation and maybe from higher rates. But most more likely it's due to higher inflation, they're definitely starting to change. When Americans drink less Pepsi and eating less Cheetos as well, because Cheetos were down too. Unless they're all on a health kick, there's a sure fire sign. And then we saw that, of course, to the University of Michigan consumer sentiment survey as well, just reinforcing that, isn't it? It did dip and dip to 66 versus 68.5 expected. But as we've been saying on this call, a change in the survey methodology really questions the exact magnitude of those kind of falls. So they're being slowly phasing in greater online representation. And I think they're almost foolish to online. And it tends to be when people will survey online, they're more pessimistic than they are when they're interviewed in person and who would have thought that. But the other really interesting one was the headline index among people who identify Democrats plunged in that month. And perhaps that's due to the kind of politics that's going on at the moment in the US. Well, okay, now China, let's talk about that very quickly, because a heap of numbers, we've got the trade numbers finally out at the weekend, a big fall in imports, a higher than expected rise in exports, new one loans were up, but not as much as anticipated. So what does that tell us? I mean, that's the idea that they're exporting, but they're not importing. That sort of reinforces the idea that there's this overcapacity in China, doesn't it? Definitely. And that's effectively what it's saying, weak internal demand, but finding export strength out there in export markets. And from a global trade point of view, does little dissuade those kinds of blocks that are arguing we need to arraign in Chinese export growth. So you've seen that, obviously, from the US and President Biden a couple of months ago, put tariffs, think on Chinese EVs and a few other things. If President Trump is elected as President come November, then you'd expect more in the way of tariffs against Chinese goods. And these numbers would play towards that, but not only that, but also Europe as well. And then also, when you see where export growth is coming from, a lot of it is coming from the developing world, particularly, say places like Brazil and those kinds of areas. They're likely to also start to pay a little bit more attention, just given how much market share China is getting in some of these categories. As for aggregate financing, it's still relatively weak. It just suggests that the weakness in the property sector is just not really being resolved to a satisfactory moment. And it also suggests those new support measures haven't really been enough to boost new mortgage lending either. We get to GDP for Q2 today, don't we, along with industrial production, retail sales, unemployment, fixed asset investment, and basically the whole shebang, except for inflation numbers, get the whole shebang over today and over the weekend. Definitely. And the market expects a bit of slowing in GDP growth on a quarterly sense. So, a 0.9% Q&Q from 1.6% Q&Q. Interestingly, those trade figures, though, with imports down and exports up, it may actually suggest a little bit of upside risks for Chinese GDP, just given export growth has been relatively strong. The other thing to look out for in China quite closely is the third plenum. And that's occurring from Monday through to Thursday. And that occurs twice a decade. And historically has been used to unveil a lot of and discuss a lot of the economic policies. In the third one, absolutely. Yeah. And that's, yeah, for the next five to 10 years. So, there have been some historic moments and the third plenum is in the past. So, will we see that this time, do you think? I don't necessarily think so. Expectations are not that high. So, not really expecting anything from there. But that's definitely what commodities markets will be looking at quite closely, just to see if there's any chink of light in terms of stimulus on the other side there. Right. So, this week, quite busy, really industrial, first of all, today, we get industrial production numbers for Europe, the Empire State Manufacturing Indexes out tonight. Jerome Powell is talking early tomorrow morning in conversation with David Rubenstein, who's the chairman of the Economic Club of Washington. It's a free-flowing discussion, a lot more interesting than the pre-prepared stuff, isn't it? David Rubenstein is actually a great interviewer. And if any, I was like that. But so, it's going to be interesting to see what comes out of that discussion. Is it, you know, a great chance he'll give more way, I would have thought. It's possible. And now that he's seen the PPI, CPI, maybe he'll be a little bit more freer to open that kind of discussion. But I think the more interesting thing for the US, actually, is going to be more on the earning side and also in terms of US retail sales, which come out on Tuesday. Just given those cautious words amongst some of those manufacturers, especially for sales for the lower end, is actually some bits of the US economy slowing a little bit faster than what most people had been puzzling in, despite the later Fed GDP now coming in around trend growth. So I think that's going to be quite important. On the earnings front, we get Goldman's on Monday, Morgan Stanley, and Bank of America on Tuesday. And the first of the tech names, we got Netflix on Thursday and TSMC, which may give some kind of indication for Nvidia and other names like that on Thursday. Right. And ECB, of course, this week as well, probably on hold, Australia's employment numbers, CPI for New Zealand, UK, Japan, and Canada. It's a busy week ahead. Definitely. And I think the New Zealand CPI is going to be really worth watching. That's on Wednesday. When you look at markets, just given that big change in language from the Albion Z last week, August, Albion Z rate card is now 52% priced. So if CPI did come in on the soft side, particularly the non-tradables bit, then that would definitely open up room for the Albion Z to start cutting rates, just given their concerns on the activity side, which is pretty evident in their prior report. For Canada, that's also going to be quite important. When you look at July pricing for a Bank of Canada rate cut, it's now sitting about 75% priced. And as to the Australian employment numbers, they're going to be looked at quite closely because they're one of the key data points ahead of the August RBA meeting. We've cancelled in 20,000 jobs for the unemployment rate to stay at 4.0%, which is broadly consistent with the RBA's May forecast track. If it were to show a retic up in the unemployment rate, then they would likely pair expectations of any anticipation of a rate rise come August. But alternatively, if it were to print a little bit lower, then maybe that would get markets more attuned to the potential for a rate hike as well. Excellent stuff, Tapas. As always, good to talk. Catch you again soon. Thank you. Thanks, Will. And there are everything you need to know. Well, there is obviously a significant football match that some of you might be interested in. There's that as well. But that's it from me for today. I'm Phil Dobby for now back again tomorrow morning. Thanks for tuning in today.