Overnight, President Trump delivered his joint address to Congress. Overall, the speech gave an overview of Trump’s accomplishment so far and what he wants to focus on throughout his presidency and thus the speech included little new information. The speech was not only about economics but also about crime, immigration, border control and Obamacare.
From a market perspective, it was most interesting to hear what Trump had to say on his tax reform and infrastructure, as we have not had much new information since his election victory. However, as somewhat expected, the speech was scant on details on his economic policy. Trump repeated that he is working on a ‘historic tax reform’, which will lower taxes significantly for both corporates and persons. He also hinted that the US needs to fix its taxation of imports and exports without being specific about whether we should expect border adjustment taxation (as suggested by Paul Ryan) or old-style tariffs.
On infrastructure, Trump said the time has come for ‘a new program of national building’ and that he will ask ‘Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States’.
In the speech, Trump also said that he believes in free but fair trade. Yesterday, we wrote that there is a risk that the US will take protectionist measures against WTO rules and a new story on Reuters supports this. The story says that the US administration is looking to simply ignore WTO rules going forward, as the US is only ‘subject to laws and regulations made by the US government’.
On foreign policy, Trump repeated that the US ‘strongly supports NATO’ but that member countries ‘must meet their financial obligations’.
In a recent interview, Treasury Secretary Steven Mnuchin said that the administration hopes to see the economic plan passed before Congress’ August recess but that it is an ambitious deadline and it could easily slip further into the year. He also said that he expects the biggest growth impact from next year, supporting our long-held view.
While the market reaction after Trump’s speech was fairly muted as expected, markets reacted to hawkish Fed comments by Williams and Dudley before the speech sending US yields higher and EUR/USD lower. Dudley (voter, dovish) said that the case for tightening has become ‘a lot more compelling’ and that the ‘risks to the outlook are now starting to tilt to the upside’. Williams (non-voter, neutral) said that he expects the Fed to consider a March hike seriously. Both were on the hawkish side compared to the minutes, which signalled that only ‘a few’ FOMC members seem ready to hike already in March. This only makes Janet Yellen’s speech on Friday more interesting, as we have had mixed signals from the Fed recently. Our base case is still that the Fed skips March. Markets now price in a March hike by nearly 70%, a May hike by nearly 85% and 1.3 hikes are priced in by June.
