US: Hopes for major changes by the new administration have faded - NAB

The election of President Trump led to a spike in business optimism, but despite the boost to US business optimism, actual conditions on the ground have not changed substantially, according to analysts at NAB.

Key Quotes

“The NFIB small business survey optimism index – largely based around hopes and expectations for the future – has held onto its gains. Small business also reported a pick up in sales, although this has been partially unwound. However, there appears to have been no flow through into hiring or investment, which remain around their pre-election level.”

“More broadly, while the US economy remains solid, growth remains at around the average rate achieved post the GFC.”

“Expectations about the changes that the Trump administration will make to taxes and infrastructure spending have been wound back. The failure of the Republican controlled Congress to agree on repeal or major changes to ‘Obamacare’ – a cause célèbre for Republican politicians – highlights the difficulties in getting major changes in the current US political environment. The proposed health care reforms were also intended to improve the budget bottom line, and so their absence also complicated the tax outlook. Tax policy is now the main focus with the markets waiting to see if that reform fares better than healthcare did.”

“Against this backdrop, the US dollar – as measured by a trade-weighted index - has been depreciating over the course of 2017, and is now below its pre-election level.”

“In contrast stock prices continue to trend up, and while longer-term interest rates have also given up some their gains, they remain above their pre-election level. Of course the US President and Congress are only one factor affecting markets; the solid performance of the US economy underpins equities while the Fed has hiked interest rates three times since last year’s election. Moreover, the improvement in global economic conditions – particularly the on-going recovery in the Euro-zone and perceived lower European political risk – have boosted other currencies, weakening the USD by comparison.”