The conflicting market narratives of the Trump administration’s ‘America First’ economic policy agenda has led us to coin the term The Trump Trilemma – which stipulates that out of 3 potential market dynamics, only 2 can co-exist at any one time, according to Viraj Patel, Research Analyst at ING.
“The 3 dynamics are as follows: (1) rising bond yields (a function of greater government borrowing / rising supply of US Treasuries to fund fiscal spending); (2) a weaker US dollar (to address US trade / external imbalances); and (3) confidence in the long-run US economy (at least relative to the RoW).”
“Right now, we’re clearly seeing the first two operating in tandem – rising bond yields and a weaker dollar – which leads us to posit that investors might have reduced their confidence in the long-run state of the US economy. This is not surprising given the heightened focus once again on the US economy's ‘twin deficits’ – which has only been exacerbated by (i) the GOP’s debt-financed tax cuts and (ii) the relative cyclical strength in other parts of the global economy.”
“The Trump Trilemma helps to put some context around the market reaction to yesterday’s US inflation data. For the US dollar to re-couple with rising US bond yields – within our framework, we’d need to see a return in (relative) confidence over the medium-term US economic outlook. In effect, this requires a positive reassessment of the extent and duration of this US economic cycle; inflation numbers do not provide this (plus it didn’t help that US retail sales printed soft). More broadly, we’re scratching our heads at finding any new positive US demand or supply shocks that could change the landscape for an economy in its 10th year of its expansion cycle. Without this, it’s easy to see the weak $ story persist.”
“The speed at which the US dollar declines will be a function of US trade policy (see our note A ‘Mercantilist and Mercurial’ Dollar Policy). USD/JPY continues to breach new lows – and looks set on a path towards 100 (our year-end target). Japan’s FinMin Aso overnight gave de facto support to recent FX moves by stating that there is no need to intervene at this stage. A clearing of the 106.00-30 area might trigger a sharper fall towards the psychological 105 handle.”
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