The attempted assassination of former US President Donald Trump
As you will know by now, yesterday morning Australian time, former US President Donald Trump survived an assassination attempt while at a campaign rally in Butler, Pennsylvania. While former president Trump survived with a relatively minor injury, two people including the gunman have died and two others have sustained serious injuries.
It’s still early in the investigation as to the motivation for the attack, but no doubt we will see a lot more in the coming days.
Before we attempt to analyse how this event may change the outlook, we acknowledge those who died or were injured.
This bulletin does not seek to keep pace with the news cycle, that is not possible. However, while it is still very early in the timeline of the attempted assassination of former President Trump, we seek to review how this event could change the outlook.
We are a day out from the start of the Republican convention in Milwaukee, Wisconsin where the party will nominate its candidate for president to contest the November election. What is apparent is that former President Trump will go to the convention as a patriot and without doubt will be the Republican candidate. Much of the commentary we have reviewed is of the opinion that the assassination attempt has only strengthened Trump’s prospects of winning his second term in the White house. One only has to view the footage post the shooting that Trump despite being injured, had the presence of mind to seize the moment and the opportunity.
The irony of this situation is that it has possibly caused more change for President Biden and the Democratic party than for Trump and the Republicans. The democratic position is more vexed now as it was struggling to address President Biden’s gaffes of last week, which, after the dismal showing in the first presidential debate, Biden was trying as hard as possible to not make any subsequent blunders, unfortunately to no avail. The consequence being that more high-profile donors, and supporters of the Democratic party, have less than politely encouraged Biden to withdraw from the race.
However, after the assassination attempt on Trump yesterday, it could make it harder for Biden to step away because any new democratic entrant to the race is now taking on a confirmed patriot. Maybe it is still far enough out from the Election that this might not be as big an issue as it appears at the moment. Suffice to say how Biden handles this in the coming days, and during the Republican convention may have a strong bearing on his fortunes in November, assuming he is the Democratic candidate.
There is much more to play out in relation to how the assassination attempt changes the US election campaigns and the respective chances of the two candidates and hence the geopolitical landscape globally as a result.
The rapidly changing face of US monetary policy
More broadly, the way forward for markets after this week will also be impacted by significant activity that has been going on. We noticed a massive change in the commentary of the US Federal Reserve (Fed) over this last week. We think Fed chair Jerome Powell is about to change tack and start cutting interest rates sooner rather than later.
At the June Federal Open Markets Committee (FOMC), Powell dealt at length with the problems of measuring CPI shelter inflation – as we have discussed for months. CPI inflation can’t fall to 2% or below this year because of the bias in the calculations. The US, and to a lesser extent, Australia, use housing rents as part of the consumption basket.
It is a very difficult task and beyond the scope of this note. Suffice to say that, even when appropriate rents are sampled by the statistical agency, they are typically constant for the period of the relevant lease – possibly more than a year. Therefore, if current new rental agreements are for lesser amounts, they do not feed through to the CPI in a timely fashion. Because of immigration and the pandemic, rents surged after the onset of the pandemic but the shelter index – as measured – is slow to return to equilibrium.
Last week the Infocus investment team discussed the US nonfarm payrolls data released on 5th July. There is a rule, named after its proponent Claudia Sahm, that in essence calculates how quickly the unemployment rate is rising. It compares the current three-month moving average of the unemployment rate to the minimum over the previous twelve months. The ‘Sahm Rule’ states that if this indicator breaches 0.5% points, a recession is likely. It hasn’t failed in the previous near 50 years.
The point being that Powell spent two days giving testimony in Congress last week. For the first time that we can remember, he seemed really worried about the impact of higher for longer interest rates on unemployment and the rest of the real economy. It’s as though he has just learnt that his inflation metric is flawed and now his ‘low, unemployment rate of 4.1%’ isn’t so low after all. People are starting to talk about Sahm! It even made the AFR this weekend.
Summary
Our pre-Trump-assassination attempt assessment is as follows:
- Powell is now aware of the upward bias in the inflation measurement. We’ve been discussing it for ages, but he seems new to the game.
- The latest US labour data showed that if the next unemployment read is only one notch higher (to 4.2%) or more, a seemingly reliable recession indicator (Sahm rule) is triggered – on his watch! This indicator is suddenly getting mainstream coverage.
- Powell is switching his focus to the Fed’s dual mandate of full employment and stable prices. He now must act but the next jobs number comes out just after the 31st July FOMC so he probably won’t pre-empt that number. That being the case the September FOMC meeting will be the first opportunity for Powell to cut interest rates. The bond market now ascribes a 96% chance that he will cut, with more to come.
A new question is whether the assassination attempt will impact their thinking. Depending on how markets respond this week, Powell could use it as an excuse to cut on 31st July. He may be wishing he had already cut. That said, a July interest rate cut is not our base case, but it is one that has gone from a zero to a material chance in a weekend.
If you have any questions in relation to this bulletin, please feel free to get in touch.
In preparing this bulletin we acknowledge the significant and valuable contribution of the independent member of the Infocus Research and Investment Governance Committee, Dr Ron Bewley.
Jeff Mitchell
Chief Investment Officer