marctomarket.com / by Marc Chandler / Nov 12, 2016
Our bull case for the US dollar has been predicated on the divergence of monetary policy and the relative health of the financial system. What is new, and investors are anticipating, is fiscal policy.
After several years of reducing the budget deficit, both Trump and Clinton promised fiscal stimulus. Trump offered more infrastructure spending and tax cuts than Clinton. His economic team, though formal appointments have yet to be announced, suggests $1 trillion fiscal stimuli (~6% of GDP), which is larger than even Sanders advocated in the primaries.
At the same time, investors are more confident of a Fed hike next month. But more than that, the derivatives market is beginning to price in a more aggressive Fed. A few days before the election, investors learned that average hourly earnings rose by 2.8% year-over-year. This is the fastest in several years, and although one month a trend does not make, it is consistent with a tightening of the labor market, and rising core inflation pressures.