New article from Tatton Investment Management: Bad news, Good news

1 September 2017

This week began (belatedly for us Britons) with bad news and seems to be ending with some good news. I’ll concentrate first on some overseas influences before looking at the UK.

North Korea has fired missiles across Japan before but Tuesday morning’s test across North Japan marked another step up in potential danger; the floods in the US and in the eastern area of the Indian subcontinent are more immediately damaging.

The floods will cause pain for many and for a prolonged period. James covers more detail about the US hurricane below. Any disaster (such as the floods) has impacts on an economy which are difficult to gauge. Assets are destroyed and work is difficult for a period. Then there’s a bounce back (which amounts to a drawdown in savings) as the rebuilding takes place, with the initial phase often pushing activity up sharply. It’s the second phase of rebuilding that matters. If the people don’t have enough personal savings or they don’t get enough help, the affected area and the people therein suffer for a long period as their capital assets are much less productive.

In the US, this may be the event that galvanises support for Trump to spend on infrastructure as promised last year. Certainly, his administration is trying to tie it to the passing of the raising of the debt ceiling. The calculus is that members of congress will not want to be seen voting for more misery in Texas.

Trump’s fortunes may be turning markedly in other areas. The discipline instilled in his administration may be progressing the tax proposals. There have been comments from his camp playing down the extent of reform, while Trump has been relatively quiet (in his own terms), and the floods will require funding, it seems that the administration is getting bipartisan backing for a program of tax cuts aimed at the “middle classes”. Steve Mnuchin has pushed back the date of the packages release but we think this is a sign of a better working relationship with congress.

The biggest help comes from an improving economy. The US employment report was a little disappointing, with the unemployment rate rising 0.1% to 4.4%, but the Purchasing Manager Survey from the Institute of Supply Managers was resoundingly positive, with the headline manufacturing survey climbing back to 58.8.

It’s not just businesses that are confident. Consumption is showing signs of climbing back to strong levels. The weekly Redbook data (a measure of retail sales) has hit 4% year-on-year growth after being in the doldrums.

This underpins hopes for growth through the rest of the year, and puts a base under US equities. Revenues should be robust although we still think that valuations will cheapen as bond yields rise. Equities may end up trading flat from here.

One of the boosts for the US domestic economy has come from the weak US dollar. That weakness coincided with the perception that the Trump administration lacked ability to get its agenda through, especially in the area of business tax and regulation reform.

To us, it looks like better confidence in the US will stem the fall in the dollar. Having spiked above $1.20/€, the dollar has shown a bit of life and we may be in for a rally.

In terms of business confidence and the currency, there’s a similar thing happening in the UK. The UK version of the manufacturing purchasing managers’ survey was strong bouncing back unexpectedly to 56.9.

We don’t have quite the same thing happening in UK politics. It may be that the Brexit negotiations are actually not important to the UK’s near-term growth outcomes, that sterling is the key thing. Still that probably means, as we said last week that growth is now coming through because of sterling’s weakness which should stabilise sterling without the need for better perceptions of the government.

One final note: Gold remains surprisingly strong (in US dollar terms). If the dollar starts to strengthen, on balance we expect the gold price to fall back from recent levels. Sometimes though, gold can be a signal of other problems so (although we do not include it in portfolios) we’ll remain interested in its progress.

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