Felon in Chief?

• Japanese equities rallied +0.8% in sterling terms
• UK index-linked and high yield bonds held their ground, ending the week flat

• Equities broadly weakened in sterling terms. Emerging markets slid
  -3.1% and Europe -0.2%
• Bonds also sold off broadly, with gilts down -0.3%

Former President Trump has been found guilty of all 34 felony charges against him by a jury in New York. The trial relates to the hiding of hush-money payments to adult performer Stormy Daniels.

A sentencing hearing has been set for 11 July, four days before the start of the Republican National Convention. In addition, three other legal cases are outstanding against former President Trump, along with a Supreme Court decision on whether he can request presidential immunity. However, these cases are unlikely to conclude before the November US Presidential Election.

The immediate question for markets is how this will impact Trump’s chances of winning in November. The impact is likely to vary depending on voters’ original leanings. Those already sympathetic to Trump may view the New York case as politically motivated, enhancing his cause. WinRed, a Republican fundraising website used by the Trump campaign, crashed after the verdict from high traffic. However, undecided voters, of whom polls suggest there are many, may be less likely to vote for Trump now he is a felon.

The next few weeks could determine how the judgement impacts the election – the outcome of the debate later this month, what sentence is passed down on 11 July 11 and Trump’s words in the run-up.

In terms of the market, the impact is less clear. Polls have generally shown Trump ahead, and this has been met with equanimity by the market hitherto. While a second Trump Presidency is expected to bring heightened geopolitical uncertainty, it likely also heralds higher government spending, and the relaxation of regulations on sectors such as oil exploration. However, flows suggest few investors are taking big bets on the election outcome, though this may change in coming weeks. Memorial Day (observed on the final Monday in May) often serves as an unofficial start to the election, and the election may gain greater attention.

Given that legal proceedings make the election outcome more uncertain, we anticipate that volatility may increase in coming months.

Ahead of the June Federal Open Markets Committee (FOMC) meeting next week, US data remains under scrutiny.

April’s Personal Consumption Expenditure index came in in-line with forecasts, arguably a positive for the Fed. At a headline level, both month-on-month and year-on-year PCE were flat at 0.3% and 2.7% respectively.

At a core level, the year-on-year rate of change remained at 2.8%, while the month-on-month calculation slowed to 0.2% from 0.3%. Crucially, a 0.2% monthly rise is consistent with a 2% annual core PCE inflation target. However, given the persistence of up-side risks, the Fed are likely to wait for further declines before initiating interest rate cuts.

While more evidence of slowing is needed, data does show signs of softening. GDP growth for the first quarter was revised down last week, from 1.6% to 1.3%. The largest contribution to the correction came from consumer spending, which was estimated to have increased by 2.0% quarter-on-quarter annualized, as opposed to 2.5%.

Business fixed investment, residential investment, and government spending were all revised slightly higher, although the key business equipment spending subcategory now shows capex growth more or less flat, after an initial estimate of 2.1%.

At this week’s ECB meeting, the Bank is widely expected to cut rates. However, data shows signs of strengthening, including inflation data.

Last week’s CPI report saw headline inflation strengthen from 2.4% to 2.6% in May and core from 2.7% to 2.9%.

Within the print, energy inflation edged higher, to +0.3% after -0.6% in April, while inflation in food, alcohol and tobacco dipped by 0.2pp, to 2.6%, reversing the increase last month. In the core basket, services inflation jumped to 4.1%, from 3.7% in April, with non-energy goods inflation dipping by 0.1pp, to 0.8%.

One element supporting services inflation is still resilient wage growth, averaging 3-4%. The Paris Olympics and UEFA Euro 2024 could put further upward pressure on costs, allowing operators in hospitality to raise prices by more than normal.

A cut is more or less priced in this week, with the July meeting a backup, and further cuts in October and January.

 

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