Trump Caution Sets in as Investors Await Next Move

It’s been mixed start to trading at the beginning of the week as Friday’s jobs data continues to sink in and investors wait to see what Donald Trump does next.

The new US President has been extremely active since his inauguration which has kept investors on their toes given the combination of market friendly and unfriendly policies that got him elected. Deregulation was the latest target for the President which provided a big boost to financial stocks on Friday as he aims to undo some of the regulatory burden created by Dodd-Frank following the financial crisis.

The unpredictable nature of Trump though makes it very difficult to anticipate what his next moves will be, as evidenced by his actions a week ago on immigration. This may ensure for now at least that while markets have remained volatile, a more cautious approach will be adopted during the bedding in period. It’s a rather quiet week from the perspective of central bank decisions and economic data which will likely feed into this as well. Earnings season may provide a distraction for investors with almost one in five S&P 500 companies due to report on the fourth quarter.

Friday’s jobs report didn’t exactly leave us any-the-wiser on the health of the US economy, despite the number of jobs being created in January far exceeding expectations. Unemployment ticked higher as participation rose, which was one of the more positive aspects of the report, even if the headline number would perhaps suggest otherwise.

The earnings component of the report was the biggest disappointment, with annual growth falling back to 2.5% from 2.9% in December. The inflation side of the Fed’s dual mandate remains a barrier to the central bank raising interest rates three times this year, as it signalled in December it intends to. For inflation to run sustainably in line with the Fed’s target, wage growth needs to improve and so Friday’s report may be seen as more of a setback, despite impressive job creation. Investors clearly took it that way as near term rate hike expectations took another hit, with the market implied probability of a March rate hike now down to just 13%.  June is still seen as the most likely meeting for the next increase, with markets pricing in a 68% chance currently.