US: Disobedient stock markets - Westpac

President Trump made sure to claim credit in his State of the Union address – and on many other occasions - for the surge in US equity prices over the past year (with at least some justification), explains Sean Callow, Senior Currency Strategist at Westpac.

Key Quotes

“He then went rather quiet as the S&P 500 fell more than 6% in 2 days. But on Wednesday he tweeted that in the “old days”, the stock market would go up on good news but today, “the Stock Market goes down. Big mistake and we have so much good (great) news about the economy!”

“We would certainly agree that there is plenty of good news on the US economy. Trump seems to be mostly referring to the equity slide after Jan non-farm payrolls rose 200k, the unemployment rate remained at a low 4.1% and average earnings growth accelerated to 2.9% - still slower than historical norms but a high since 2009.”

“But Trump could equally have been entitled to puzzle over why there was an even steeper fall in stock prices on Monday, a day when the ISM non-manufacturing index easily beat expectations, jumping to 59.9, a high since 2005. Little wonder Fed officials continue to express optimism over the economy and talk of the need for further rate rises.”

“Perhaps Friday’s equity fall was indeed related to fear of yet higher yields as wages growth picked up. But Monday seemed to be more about liquidation of investments that bet on continuation of the low volatility of recent months.”

“At this stage, the Fed seems happy to brush aside the arguably overdue return of global equity volatility. More important for the US dollar than the S&P 500 is likely to be the Treasury market, where the 10 year is probing yield highs since 2014 and 2 year yields have snapped back since Monday. It has been a good week for the dollar and while we are wary about the week ahead, it is looking increasingly likely that the past week will prove to be a turning point in its fortunes.”