What Matters…and What Doesn’t For The Markets

by Dr. Charles Lieberman, Chief Investment Officer

The coming week is chock full of major developments that will garner considerable media attention and a few might actually matter for our economy or markets.  The G-7 meeting this past weekend started it all off, there’s a meeting tomorrow between Presidents Trump and Kim to discuss nuclear disarmament in North Korea, a U.S. judge will rule on the AT&T-Time Warner merger, policy meetings of all three major central banks, and the U.S. may release a list of Chinese products subject to tariffs.  There’s so much scheduled, investors are likely to suffer whiplash as they lurch from one major story to the next.  None of these events is insignificant.  But few are likely to change the outlook for the economy or the markets in the near-term.

There is no doubt that the meeting between Trump and Kim is nothing short of historic, yet those discussions could last for months (or dissolve quickly and possibly be resurrected many times) before resolving any disputes.  Unless the talks melt down and lead to a military conflict, no significant economic effects are likely to emerge.

The legal ruling on the AT&T-Time Warner deal could be important for the precedent it sets for mergers in the future, but its effects on growth, inflation, and policy are likely to be immaterial.

The FOMC meeting this week is universally expected to produce another 25 basis point rate hike for the U.S., but only a modest shift in views of its participants could suggest four rate hikes this year, rather than the three currently projected.  Even such a modest shift could have sizable ramifications for markets.  Many investors think that the Fed can only hike rates a few more times, either because they think market forces will constrain such action or because they see little further need for higher interest rates.  There are many false beliefs that lead to these erroneous conclusions, so it is difficult to comment on all these possibilities.  But the bottom line is such beliefs will wither as the Fed is forced to adjust policy in response to a strong economy that is increasingly brewing up increased inflation pressures.  Opinions always disappear in the wake of facts.  The Fed sees the facts and will keep hiking rates accordingly.

Overseas, the ECB is getting closer to terminating its bond buying program and more hints of that, possibly even including a termination date, could come this week.  Unemployment has declined sharply in select countries in the Eurozone and the risks of deflation have vanished.  A few years ago, a case for monetary stimulus could easily be made for all of the countries within the EU.  That’s no longer the case.  Germany and a few others already enjoy low unemployment.  Italy may soon introduce a large fiscal stimulus, but the ECB would then be even less inclined to keep interest rates artificially low.  Even Japan will soon reconsider its bond buying program and the Bank of Japan will need to prepare markets for that announcement.

The battle royal over trade is likely to continue with upcoming skirmishes over which products will be subjected to tariffs.  Moreover, the broadside approach engages many competitors at the same time, rather than knocking them off more easily one at a time.  Trump is trying to ratchet up pressure on China to end some of its more egregious policies of trade barriers, theft of intellectual property, and requirements of technology transfer for American companies to be permitted to access Chinese markets.  This risks a nasty response.  Yet, unfair trade practices have been a feature of the landscape for decades and fully deserve policy attention.  It remains to be seen if Trump’s approach of shining klieg lights on the issue and turning it into a major political battle that could embarrass foreign leaders, if they give in so publicly, can possibly be effective.  That seems doubtful.  I would prefer a more subtle approach.

Even so, China’s response has been quite measured, so far.  Its leaders understand they export vastly more to the U.S. than we export to them, so they really do have far more to lose in a full-fledged trade spat.  Plus, as everyone seems to know, because every pundit makes the point, everyone loses in a real trade war.  Unsurprisingly, neither side seems to want a trade war.  Rather, they want to suggest it could happen to extract concessions from the other side.  A trade war would be highly disruptive to economies and markets, so it is likely both sides will want to stop short of triggering one.  Expect lots of interesting theater and, perhaps, some historic events, this week, all of which could move markets erratically over individual days.  But don’t expect any real change to the economic outlook or any meaningful change to the outlook for equities or bonds.