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Briefing highlights

  • The state of Trump’s union
  • What taxes and repatriation could mean
  • Where the U.S. economy is headed
  • Markets at a glance
  • What could happen to U.S. dollar
  • Manufacturing sales rise in November

'Contrasts and contradictions'

Everyone has an adjective for [insert yours here] President Donald Trump, but there's no denying he's getting some of what he wants in pushing American companies to say they're putting America first.

By no stretch does this mean his economic agenda is a success yet, but he heads into his second year in the White House with some notches on his belt.

"For all the criticism of President Trump, the nature of his presidency and his economic policies, he appears to have got what he wanted in prompting U.S. companies to reinvest their profits back into the U.S. economy," CMC markets chief analyst Michael Hewson said.

Mr. Hewson's comments followed this week's announcement from Apple Inc. that it plans to bring home a huge pile of cash, pay $38-billion (U.S.) in taxes, and pump up its American operations, creating about 20,000 jobs in the process.

President Donald Trump takes a tour of H&K Equipment Co. with owners Peter Cicero and George Koch, right, during a visit to promote his tax and economic plan, Thursday, Jan. 18, 2018, in Coraopolis, Pa. Treasury Secretary Steven Mnuchin follows at far left.

This is a brief look at the impact of Mr. Trump's economic policies, not those other ones that have sparked outrage around the world.

Year One

"After a turbulent first year dogged by investigations, staff turmoil and low approval ratings, President Trump is heading into 2018 with some momentum," said Angelo Katsoras, geopolitical analyst at National Bank Financial.

"He has managed to pass significant tax cuts, nominate many conservative judges, and reduce regulations, which has been particularly lauded by small to medium-sized businesses," he added.

"All of this, his supporters claim, has helped to strengthen the economic recovery and drive stock market valuations to record levels. The Trump administration will look to build upon this momentum in 2018."

Bank of Nova Scotia's economics team believes the U.S. ended the year with economic growth of 2.3 per cent; modest, to be sure, but also a low jobless rate that Europeans, for example, would die for.

"The U.S. closed out 2017 on a relatively high note, with strengthening data on economic activity matched by optimism connected to the passage of USD 1.5-trillion in federal tax cuts for the next decade that should put U.S. business on a more competitive footing compared with their foreign counterparts," Scotiabank said.

Yes, but …

John Normand, head of cross-asset fundamental strategy at JP Morgan Chase, looked recently at how we'll know whether the Trump administration has been transformative in the second year, given that the first really hasn't been, despite the President's inroads.

"This week President Trump completes one year in the White House, a tenure defined by contrasts and contradictions," Mr. Normand said.

"His approval rating is the lowest of any postwar president after 12 months in office (39 per cent), yet he has presided over landmark tax legislation, decade-high consumer confidence and all-time high small-business optimism."

Yes, but: "His administration has introduced the fewest federal rules and regulations in 30 years … yet the share of small businesses citing regulation as their single-biggest problem hasn't declined much from the Obama-era average."

Yes, but: "His rhetoric on trade, immigration and geopolitics has been the most nationalistic of any modern president, but world trade volumes have arisen to cycle highs and market volatility has fallen to near all-time lows."

Yes, but: "Tax cuts and deregulation have been central to his economic agenda since the 2016 campaign, yet cross-border equity and [foreign direct investment] flows still favour non-U.S. economies."

Yes, but: "A slogan of America First hasn't resulted in broadly higher returns on U.S. versus non-U.S. assets: Many foreign stock markets (Japan, China, [emerging markets] generally) have outperformed the S&P 500 since the election, and the dollar has fallen versus most currencies."

"So despite comparisons to Reagonomics in the 1980s – or even Clintonomics 10 years later – Trumponomics hasn't delivered much evidence of transformation," Mr. Normand said.

Of course, time will tell, and there's much on the horizon, from negotiations to remake the North American free-trade agreement to a reconstituted Federal Reserve to mid-term congressional elections.

Year Two

Scotiabank's economists project economic growth will perk up to 2.5 per cent this year, and that unemployment will ease even further to just 4 per cent.

Next year, though, growth should slow to just 1.8 per cent, Scotiabank said.

"The composition of growth is expected to improve somewhat as strong consumption growth is increasingly matched by broadening industrial activity and stepped-up business investment, spurred in part by the tax changes that provide more advantageous treatment of capital equipment purchases," the bank said.

"But over all, federal tax reform is expected to add only a marginal contribution to economy-wide real GDP in its initial years: The output gap is already closed, labour markets are tight with unemployment at a cycle-low, personal tax reductions are skewed toward high-income earners with relatively low marginal propensities to spend their savings, and most studies imply that ongoing increases in business investment stemming directly from the tax changes will be small," it added.

"Farther out, the tax package is likely to become a drag on growth as some tax cuts expire."

Taxes and repatriation

Apple's announcement was a blockbuster, given its global prominence, and dominance, and the billions we're talking about.

Though they may not be as rich as Apple, expect other companies to follow suit in the wake of the U.S. tax overhaul.

Mark McCormick, North American head of foreign exchange strategy, looked at the issue in terms of what it could mean for the U.S. dollar, along with equities.

"It is essential to highlight the difference between an accounting shift between custody banks and a currency flow," Mr. McCormick said.

"Assuming companies repat about 17 per cent of this total stock and the amount held in non-USD assets rests around 20 per cent, that leaves a possible [foreign exchange] flow of $70-billion," he added, but stressed this is in the context of a massive spot market and U.S. current account deficit of about $550-billion annually.

"This backdrop leaves us believing that the impact of the repatriation is likely a wild card rather than a game-changer for the [U.S. dollar]," Mr. McCormick said.

Probably, he said, the bigger impact is on Wall Street.

"Equities could benefit from share buybacks and dividends payouts against a more muted growth impact," he noted.

"Indeed, another equity boost could offer tailwinds to global financial conditions, reinforcing the reflation trade and policy normalization outside the U.S. For the [U.S. dollar], this backdrop would further hinder it – not rescue it."

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Markets at a glance

As for the U.S. dollar, observers are pondering how it could react to a government shutdown in Washington.

Citing three examples over the last quarter-century, Royal Bank of Canada's Elsa Lignos noted those shutdowns each lasted two to three weeks, the last one coming in October, 2013.

"A shutdown became increasingly likely through the last week of September, 2013, and yet [the U.S. dollar index] was flat during that period and through the shutdown itself," said Ms. Lignos, RBC's global head of foreign exchange strategy in London.

"A shutdown would impact Q1 GDP (though one would expect a positive offset to Q2, assuming the situation was resolved)."

If it happens again this time, the impact on the greenback could be "more negative" for three reasons.

"(1) Relations between Congress and the president are unusual and in many ways dysfunctional," Ms. Lignos said.

"(2) Congress needs to raise the debt ceiling within the next few months (deadline anywhere from late February to early April) – failure to do so would have wider market repercussions, and (3) momentum and sentiment are already negative-USD so it is pushing on an open door," she added.

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Factory sales up

Canada's manufacturing sector is basking in the glow of an optimistic sales report.

Shipments climbed 3.4 per cent in November to a record $55.5-billion, led by the transportation, energy and chemical industries.

But just 12 of the 21 industries measured recorded gains, accounting for more than 80 per cent of the sector.

Inventory levels climbed 0.9 per cent, the second straight jump, unfilled orders fell 0.9 per cent, and new orders declined by 1.8 per cent, Statistics Canada said.


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