The attempted assassination of former US President and presidential candidate Donald Trump on Saturday had an impact on markets when they opened after the weekend. The immediate reaction among traders was to bet that the attack would increase his chances of winning the election.
As a result, the dollar gained against all of the major currencies, and bitcoin bounced. Traders are pricinging in the potential effects that a second Trump term might have with higher tariffs and tax cuts. Trump’s interest in bitcoin also helped boost cryptos over the weekend.
The Broader Picture
The latest political event is seen generally giving the dollar tailwinds. But it also comes at the end of a crucial week for data that has shaped expectations for the future of rate hikes, as well as key secondary economic indicators expected in the coming days. Following the slower than expected CPI print, the market has moved to price in two rate cuts this year, with a significant firming of the chances for easing starting in September.
The weaker jobs numbers and easing of shelter prices has once again brought up investor worries about the resilience of the US economy. Interest rates staying high for a long time are generally perceived to weigh on economic growth. The Fed’s GDP Now predictor has been cutting its projections for Q2 GDP growth, now seeing it at just 2.0% annual rate.
The Growth That Isn’t There
Some analysts have pointed to trends in the data suggesting that US economic activity has been propped up by government spending. That includes the bulk of new hires being in the labor sector. Increased Federal spending (funded by a still large deficit) contributes to increasing the nominal GDP, as well. But with pandemic-era spending ending, and the government looking to balance out its spending, that weighs on GDP growth figures as well.
Stock markets that have been hitting new record highs have been buoyed almost exclusively by a small number of mega-cap tech stocks. This “narrow” stock growth has left many analysts worried that the stock market has become “top heavy” as market valuations almost double historic levels. That is, stock prices have been rising much faster than company’s profits, making them over valued – a sign that a market correction could be in the works. All of that leads to a potential reliance on safe haven assets like gold and the dollar.
What to Look Out For
Fed Chair Jerome Powell is expected to speak later today, but the consensus is that he will repeat what was said before Congress last week. Focus is on tomorrow’s Retail Sales data, which is a strong indicator of consumer sentiment. That is projected to show meager growth of 0.1% on the monthly basis, the same as in May. But excluding automotive sales, it’s expected to repeat last month’s -0.1%.
Later in the week is the release of building permits data, which will get renewed focus in light of the expectation for slowing mortgage rates and lower shelter cost reported in last month’s CPI. Building permits are expected to be unchanged at 1.4 million, with housing starts turning back to positive growth at 1.31 million over 1.28 million in May.
