All Eyes on Congress as Trump Issues Ultimatum

Financial markets are in wait and see mode on Friday although there is an underlying sense of optimism, after Donald Trump dug in his heels on the revised healthcare plan and declared Congress should accept the changes or live with Obamacare, paving the way for government to refocus its attention on tax reform.

Is Trump’s ultimatum on healthcare win win for markets?

With the vote looking very close right now, Trump has taken quite a big gamble because an inability to pass the new healthcare bill through a Republican controlled Congress when most are in agreement that Obamacare should be scrapped, will cast doubts on what other promises he will be unable to deliver on. That said, should the gamble pay off then in the short term it could reflect well on his ability to get things done, the only downside being that similar tactics may not be so effective in the future.

Make or Break for Trump’s Reflation Trade

Still, as far as markets are concerned, the ultimatum that Trump has delivered should be good news. Trump has told lawmakers that a rejection of the plan will mean Obamacare stays in place and attention will turn to tax reform, one of the more stimulative policies that has driven the market rally since the election. While the sell-off earlier in the week suggested that an inability to get the healthcare plan passed will be bad for markets, this latest ultimatum should be win win for the markets, as either way it seems Trump is moving onto tax reform. The only risk now is that Trump suffers a backlash that could jeopardise his tax reform and fiscal stimulus plans.

Three Fed officials scheduled to appear as markets risk under-pricing rate hikes this year

With the vote expected later in the day or even over the weekend if we see further delays, there may be some hesitancy in the markets as this could strongly influence how they reopen next week. That said, there are other things to focus on today, with three Fed officials scheduled to speak including William Dudley, Charles Evans and James Bullard, the first two of which are both voting members on the FOMC this year. The Fed has struck a less hawkish tone since it raised interest rates last week which has triggered some profit taking on those positions that built up into the meeting. Ultimately, policy makers still appear to see two more rate hikes this year, something the markets are in danger of under-pricing after the correction over the last week. It will be interesting to see whether today’s speakers continue to tread carefully when asked about the rate outlook.

Fed Probability

Source – Thomson Reuters Eikon

Eurozone PMIs suggest ECBs difficulties turning to how to manage tightening cycle in two tier eurozone

It’s been a relatively quiet morning in Europe so far although we are seeing the euro make some decent gains after PMI data suggested the regions recovery is gathering pace. Faster job growth, higher business activity and rising inflationary pressures – largely driven by higher commodity prices and weaker euro – are all positive signs for the region and will likely ask questions of the ECB later in the year. The ECB will reduce its monthly purchases as of next month in a move that it insisted is not tapering and yet, markets now appear to be expecting another reduction later this year, if not a rate hike. I still think the ECB needs to take a cautious approach here as the region continues to be split between those with a strong economy, low unemployment and inflationary pressures and those at the other end of the spectrum, with others somewhere in the middle. Managing the two or even three tier eurozone is going to be the next great challenge for the central bank. It seems that no matter what it does from here, there is going to be dissent.

Economic Calendar

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.