Monday 21st August 2017
Bannon's gone and Jackson Hole looms ..... the market's not sure what to make of either one
ref :- "Yellen, Draghi Head to Jackson Hole Amid Inflation Unease " , Bloomberg Markets
As Svengalis go, Steve Bannon has been less of the "Spider in his Web" type character as originally imagined by author George du Maurier , and more of a particularly belligerent political idealogue picking fights at every turn . His brand of "alt-right" economic nationalism champions an inward-looking "America First" policy and a fervent desire for an all-out trade war with the likes of China. In Donald Trump, no-one's idea of your average Republican politician, he found an enthusiastic co-believer and it was Bannon's undeniable intellect that identified the way to take a floundering campaign all the way to the Oval office.
At first sight, his departure from the White House certainly seems like a victory for the more liberal figures in the administration (it's all relative) whom Bannon so despises. Much of the media likes to refer to the likes of Gary Cohn, Jared Kushner and H R McMaster as the "adults" -- Mr Bannon calls them the "Democrats", and it's not a compliment.
Friday's market reaction to the news, which saw losses on equities turn into gains, was a knee-jerk reflection of investor preference for policies that now look likely to be less confrontational and more supportive of global trade than those that Mr Bannon would support. Fair enough, but even if the cheering of traders briefly drowned out the unfortunate talking heads being interviewed on CNBC and elsewhere, today's muted performance by stocks confirms that the reaction could hardly qualify as euphoric exactly, and may not have "legs".
Possibly, traders have just got other things on their minds : China trade tensions, within which an investigation into Chinese abuse of Intellectual Property rights (and resulting action) is largely supported, but wider conflict is not ; the increased danger of a flare-up with North Korea as the US and South Korea start joint military exercises ; and of course the Jackson Hole conference later this week. But it's also hard to avoid the feeling that it would very premature to assume that Mr Bannon is in any way a spent force in the idealogical battle just because he is no longer formally a special advisor to the President. Possibly, the opposite may be true.
In fact, many believe that back at the helm of his alt-right platform Breitbart News, Mr Bannon can really remove the gloves and make life very difficult for an administration trying to push through any policies that don't suit his own agenda. In other words, he might be even more of a problem for Messrs Cohn & Co outside the White House than he was in it. Others are of the view that concentrating on Steve Bannon is to miss the point -- by far the most important proponent of isolationist, protectionist policies likely to harm both trade and the US' standing in the world is the President himself. He and Mr Bannon remain as one on many issues (that's what brought them together in the first place).
There's a theory doing the rounds that the President only sanctioned the exit of Mr Bannon because his vanity will not tolerate the suggestion that Mr Bannon's reputation as a Svengali figure implies a level of control over the President's thinking. It's very possible that the theory is mischievous in intent. It would certainly add yet another theatrical twist to the irresistible melodrama surrounding this White House. Whatever the case, it would surely be naive to assume that Mr Bannon's influence over the President is at an end.
And so back to Jackson Hole, the mountain resort in Wyoming where central bankers and others will gather for their annual get-together starting Thursday. The theme this year is "Fostering a Dynamic Global Economy". It sounds suitably anodyne, but in fairness serious challenges ranging from fast-rising asset valuations to the uneven effects of globalization that prompted the rise in populism represented by Brexit and the election of Donald Trump (him again) are much easier to tackle with faster growth.
The truth is however that addresses on Thursday from Fed Chair Janet Yellen and ECB President Mario Draghi will capture most investors' attention, and not necessarily because of the topics they are down to speak about. No doubt Ms Yellen's thoughts on financial stability will be of interest, and Mr Draghi has said that he will stick to the theme of the conference. But that won't stop investors used to getting some profitable insights at Jackson Hole trying to glean some clue as to their future monetary policies.
In particular, how are they going to reconcile a situation where accepted monetary theory would call for a gradual withdrawal of stimulus as growth continues and unemployment falls, whilst at the same time stubbornly low inflation demands continued easy policies ? The lack of inflationary pressures is likely to be the key discussion area this week. Central bankers mostly still adhere to the theory that given economic strength and falling unemployment, sooner or later inflation must rise (remember the Phillips Curve ?), but inevitably there will be an examination of whether that long-held market truth is till valid.
It would be hard to exaggerate the importance of inflation with regard to policy, which makes such discussions very big news indeed for the longer term. In the shorter term and as to how this week might affect markets, we are not likely to get anything directly from Ms Yellen either on rates or on a start to reducing the balance sheet ..... and we definitely won't getting anything overtly to do with policy from Mr Draghi. But it's just possible that their input into the growth / unemployment / inflation conundrum might reveal something about their intentions.
They wouldn't be so careless, would they ? Definitely not ..... not unless they wanted to be, that is. And if Mr Draghi in particular is in the mood to drop a few hints, perhaps he might give us a clue as to whether the unwelcome strength in the Euro this year might be undermining any ECB plans for tightening in the immediate future.