Macro Weekly – Is this a farce, or what?

by: Han de Jong

  • US travel ban measures considered unconstitutional. Presidency looking very chaotic
  • Chinese January trade data are very strong, but may overstate underlying strength
  • German orders and production data are sending conflicting messages, orders most likely right
Macro-Weekly-10-February-2017-2.pdf (155 KB)

A few weeks ago the title of my weekly comment was: ‘Let the circus begin’. It was the very start of the Trump presidency and I was expecting a lot of noise. I have not been disappointed. Or perhaps, I have been disappointed in that there has been even more ridiculous noise than I expected. Is this the leadership of the largest economy in the world? Should the US President become publicly involved in whether or not a retail chain carries his daughter’s products? I really do not think so. But even more serious are the shenanigans related to president Trump’s travel ban. Just a few weeks ago, the president took an oath in which he promised to “preserve, protect and defend the Constitution of the United States” to the best of his ability. It is now just a few weeks later and the President has been defeated twice in the courts for having taken a measure that is a violation of the Constitution. If it wasn’t such a serious issue, one would consider it extremely funny. It is at least ironic. Allegedly, the Trump team are going to take the case to the Supreme Court. That court currently has eight members split 4-4 between conservatives and progressives. If the vote in the Supreme Court results in a tie, the suspension of the travel ban stands. I am not an expert, but my understanding is that it is unlikely the Supreme Court will overturn the decision of the Federal Appeals Court in San Francisco, which upheld a ruling by a Federal District Judge in Seattle. Interestingly, the Court of Appeals consisted of three judges, one of whom was apparently appointed by President Bush and would have been the most likely judge to support President Trump’s travel ban. But he did not; the court’s decision was unanimous. An appeal to the Supreme Court can happen quickly, apparently, and a ruling would also be quick. So it looks likely that the new President may lose three court cases for acting in violation of the Constitution within a month after taking an oath to preserve, protect and defend the Constitution.

What we need is some humour

Meanwhile, more and more videos are posted on the ‘everysecondcounts’ website with countries ‘introducing’ themselves to the new President. What they have in common is a good sense of humor, which is badly needed in these tumultuous political times.

European political uncertainty has also increased in recent weeks, in particular with Republican presidential candidate Fillon under pressure due to a scandal concerning his family. What hasn’t changed in the French opinion polls is that Marine Le Pen will be defeated in the second round by whoever will be her opponent.

Why are risky assets not correcting?

Given the more than chaotic start of the Trump presidency, it is remarkable that markets for risky assets appear completely unperturbed. After rallying following the US elections, and given the unpredictability created by the Trump chaos and also the political uncertainty in Europe, and relatively high valuations, a correction would not have been surprising.

The question is why a correction hasn’t happened. There are three possible answers. First: just wait and see, a correction is just around the corner. The second is that the market makes a favourable assessment of the impact of the Trump chaos and the political uncertainty in Europe on the economy. A third is that the negative forces of the Trump chaos and political uncertainty in Europe are cancelled out by positive surprises elsewhere.

Is something else outweighing negativity?

If one wants to support the last view, one has to look at economic data. On that basis, I would not rule out that third option. As I have argued before, data related to world trade has shown remarkable strength towards the very end of last year. This is visible in the trade data in several countries, and also in data from airports relating to air freight. The same, though to a lesser extent, is true for shipping data.

The most recent set of trade statistics came from China. Exports, in USD, were up 7.9% yoy in January, a sharp improvement on the -6.2% in December and much better than the data seen last year on average. Imports were up 16.7% yoy, against a plus of 3.1% in December. One has to bear in mind that the January data was flattered by positive base effects as January last year was a very weak month. In addition, Chinese data can be very erratic in January and February as the Chinese New Year holiday moves around a bit. Nevertheless, I think this data is strong and it fits well with other data from around the world.

Germany: conflicting data

Other pieces of important economic data came from the German industrial sector in recent days. Industrial orders were up 5.2% mom in December and 8.1% yoy. This was largely due to a strong increase in orders from other eurozone countries for capital goods. This is very good news as it may indicate that business investment is picking up. Unfortunately, industrial production was surprisingly weak in December, falling 3.0% mom and falling 0.7% yoy. Normally, orders and production work in tandem, so what is going on here? At least one of these series is providing an incorrect picture.

My guess is that the production numbers are wrong. Perhaps the orders data is overstating underlying strength, but at least the strong orders data is consistent with a lot of other data. In addition, there appears to be a particular problem with the seasonal adjustment. December 2016 had more official working days previous Decembers as the public holidays fell partly on the weekend. However, many people appear to have taken time off anyway. I am not sure why this problem would push German production down in December and it seems to have pushed output numbers up in other countries. UK industrial production growth surged to 4.3% yoy in December, Dutch production growth to 4.7% and the Italian number is 6.6%.


Overall, I think the global economy is in a good place. Growth momentum is strengthening. I cannot think of good reasons why this would be reversed any time soon. Meanwhile, political uncertainty in the US and in Europe is continuing and the risk of a correction in markets for risky assets is far from impossible. The big question really is: if you sell risky assets, what are you going to buy?