Unfortunately, it’s a fact that the news about Trumpcare isn't constructive at all.
There are now two more Republican senators who declared on Monday night that they would oppose the Senate Republican bill to repeal the Affordable Care Act.
It seems unlikely that the bill can be revived in its current form.
What does this mean for investors?
Well, a couple of things:
It signals that President Donald Trump’s ability to get his agenda through the legislative process is compromised, which means it would be unwise for investors to incorporate promises from the White House into asset prices.
If the bill is to be given a decent burial (and assuming Trumpcare is either lower priority or doesn’t happen at all), then Congress can get on with the fiscal matters that investors do care about, albeit following a Congressional, rather than a White House, agenda.
The dollar has weakened on the developments, presumably focusing on the risks of an enfeebled president so early in the administration, although the dollar is fundamentally biased to weakness at the moment.
There is still the concern that if thwarted in Congress, Trump may seek to double down on areas he can control, in particular trade.
However, the United States' aims in the NAFTA negotiations that were announced on Monday were not nearly as bad as had been feared. Trump has also given the go-ahead to increase the number of temporary immigrant workers into the United States.
Trade does remain the area to watch, however.
The Reserve Bank of Australia minutes were unusually more explicit than many central bankers in suggesting that the “neutral” level, which is the rate at which the Australian economy is in equilibrium or balance, of the Australian central bank’s “cash rate” was 3.5 percent, which is 2 percentage points above today’s cash rate that stands at 1.5 percent. The Australian “cash rate” is as we could say in some way the Australian version of the Fed funds rate.
Normally, central bankers do not like to be as explicit as that about where “neutral” lies, particularly in these times of stirring structural change. That explicit number gave the Australian currency a bit of a boost, although the Reserve Bank of Australia (RBA) minutes were hedged with some cautious talk about Australian specific economic considerations, including the housing sector.
This brings as for a moment at what could come out of next week’s Federal Open Market Committee (FOMC) meeting on July 25-26 that is scheduled without a press conference.
Here we are not talking about the probability or not of a Fed funds rate hike, but about the possibility or not of a Fed’s balance sheet announcement notwithstanding that markets, at least until now, expect a balance sheet announcement at the FOMC meeting on September 19-20 with a start date on October 1.
The FOMC minutes of the June meeting that were published on July 5 do not exclude at all that next week there is a possibility, notwithstanding that the probability is very, very low, we could have a balance sheet announcement.
Fact is that the June FOMC minutes have shown us there is no doubt that the present economic conditions allow such a move and that the markets are prepared for it, which is of course important.
Besides all that, it’s also a fact that with the actual series of unexpected events at the Congress the FOMC could, which doesn’t mean it will, decide to start the operation of winding down its balance sheet earlier than originally planned as a precautionary measure in order to avoid any form of clash in case a serious debt ceiling dispute should develop this fall.
The Congressional Budget Office estimates that Congress will need to raise the legal limit on Treasury borrowing to avoid default by mid-October.
Maybe it could also be worth to keep in mind last week’s Fed Governor Lael Brainard’s prepared speech “Cross-Border Spillovers of Balance Sheet Normalization,” wherein we read: “If the data continue to confirm a strong labor market and firming economic activity, I believe it would be appropriate relatively soon to commence the gradual and predictable process of allowing the balance sheet to run off.”
That said, and as usual, let’s wait and see while remaining prepared if some surprising announcement should come out from next week’s FOMC meeting.
Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.