Can government spending ‘Trump’ rising production?


Markets are giving the US President the benefit of the doubt on his tax cutting and infrastructure spend promises, but we question his ability to negotiate a higher debt ceiling to execute on these promises.

We believe Trump’s election pledges are likely to be watered-down over time, which could deflate some of the market’s recent optimism. We are already beginning to see cracks appear with public disagreements between President Trump and his cabinet nominees. We believe the market is mispricing inflation expectations. Recent oil price moves, which have an 84% correlation with US CPI, suggest inflation could hit 2.8-3% in the first quarter of 2017, compared to consensus expectations of only 2.5%. An upside inflation surprise is likely to drive investors toward real assets with commodities being a key beneficiary.

Commodities have been an area of strength in 2016, and should continue to be so in 2017 with real assets in general likely to benefit from Trump’s proposed infrastructure program. Despite varied fundamental drivers, demand from emerging markets, particularly China, is likely to be a continued source of commodities consumption. Alongside the grind higher in global demand, substantial cutbacks to capital expenditure budgets will restrain supply. The resulting fundamental tightening in underlying conditions should keep the commodity complex well supported in coming years.

  • Tightening in agricultural supply begins. Falling wheat planting in the US indicates that farmers have responded to weak prices. Record production of soybean and corn in 2016/17 could give way to tightening in 2017/18.
  • Rising production likely to keep industrial metals subdued in the near-term. Robust Chinese growth in 2016, alongside bullish infrastructure comments from President Trump, have kept the momentum going for the industrial metals rally, despite a short-term correction and rising global production. Although prices could consolidate in the near-term, capacity limitations will combine with rising demand to lift prices further down the line in 2017.
  • Rising US oil production to cap oil price recovery. Rising speculative investor positioning continues to show signs of optimism within the energy space but we see a risk of falling prices. The steady rise in rig counts in the US and expectations of rising shale production is likely to cap an extension of the oil price recovery despite expectations for an increase in global demand.
  • Price momentum likely to continue for precious metals. While President Trump’s pro-industry plans will likely boost demand for platinum, palladium and silver, the yellow metal may struggle to fulfil its safe haven role this year. Net speculative positions recently turned bearish, as rising inflation offsets the positive effect of political uncertainties on gold prices.

James Butterfill – Head of Research & Investment Strategy – ETF Securities