Daily Comment (February 16, 2017)
by Bill O’Grady, Kaisa Stucke, and Thomas Wash
[Posted: 9:30 AM EST] We are seeing a bit of weakness this morning in equities but this looks mostly like a normal market pause. The dollar is lower despite growing talk that the Fed is moving to raise rates. Not only did Chair Yellen signal that hikes are coming, but Boston FRB President Rosengren, a long-time dove, is calling for three hikes this year. The most likely reason for the dollar weakness is that Chair Yellen expressed opposition to the border adjustment tax. The opposition to this tax is growing and there is rising speculation that corporate tax reform won’t include this provision. If true, that removes an element of dollar support.
The turmoil coming out of Washington is relentless. Vociferous leaks continue out of the intelligence apparatus, the White House appears in disarray and Congress looks to begin investigations. All these things would seem to undermine confidence for investors, consumers and businesses. However, that couldn’t be further from what we are seeing. The economic data is improving and the survey data is strengthening. Today’s evidence comes from the business outlook survey from the Philadelphia FRB (see below). The numbers were more than double the forecast and the trend in the data suggests growing optimism.
Some of this improvement appears to be simply organic. After nearly eight years of slow growth, we are finally starting to see some animal spirits return to the economy and markets. At the same time, hopes for regulatory relief and fiscal stimulus are supporting sentiment. Progress on these fronts may slow if the president becomes mired in scandal and investigations. On the other hand, Congressional Republicans may simply forge ahead with traditional GOP policy positions, which should be supportive for equities.
We are closely monitoring the issues and concerns coming out of D.C. We do think they are important but, for now, they are not enough to derail an improving economy and earnings. As long as the political problems don’t affect the economy, earnings and the progress of favorable policy, these issues are noise.