Greater economic and political risks still to come...
Political risks set to increase and post-election optimism in the US needs to translate into actual improvements in consumers’ living standards
Even as the Federal Reserve look to increase interest rates next week, financial conditions are as tight now as they have been in years and, as Macro Thoughts showed last week, 4.6% US unemployment in 2016 is not the same as 4.6% unemployment in 2007. When US soya bean exports make up 0.9% of 3.2% GDP, purely because of poor South American harvests, that is not the signal for stronger growth, especially when the first half of 2016 was so poor. The Dollar continues to strengthen, mortgage rates are higher, curves are steeper, the differential between US and European interest rates is the widest since the 1980s and emerging markets have suffered.
Post-election optimism in the US will need to translate into actual improvements in consumers’ living standards, as only then will there be the necessary confidence to release some savings and demand might finally be stimulated. It is all very well increasing production, but the problem is demand. Demand is the driver of growth, so is the US consumer willing to spend some of their savings that have built up over the past 8 years? Electorates are voting for change.....
On August 26, 2016, Macro Thoughts* warned, ‘When Renzi pushed constitutional changes through the Italian legislature at the beginning of the year, he would have felt confident about the outcome of a constitutional referendum, which would strengthen his position. Things have changed since; the Italian banking system has deteriorated to such an extent that bailouts are needed and German politicians are trying to force bank bondholders (who are also account holders), to take losses. Under such circumstances, disgruntled Italian voters may be stoked by anti-European feelings (even Rome has an anti-EU mayor now), which could put Italian/EU cooperation in jeopardy’.
*previous Macro Thoughts highlighted this week.
August 26, 2016, Macro Thoughts, 'Given global geopolitical risks, to worry about just ¼% Fed rate hike seems futile'. http://www.macrothoughts.co.uk/given-global-geopolitical-risks-worry-just-%C2%BC-fed-rate-hike-seems-futile/
July 29, 2016 Macro Thoughts. http://www.macrothoughts.co.uk/never-wise-underestimate-price-action-august-especially-carney-weale/
May 27, 2016 Macro Thoughts. http://www.macrothoughts.co.uk/macro-thoughts-may-27-2016/
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