Going Dutch and Fed’s next big data hurdle

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The outcome of the Dutch general elections would tend to support my view that while nationalist and/or populist parties in Europe are in the ascendancy, there has been a tendency to over-estimate their reach and their ability to dismantle the eurozone and/or EU.

It has also reinforced my expectation for the French presidential election that an above-average voter turnout would at the margin help centre-left candidate Emmanuel Macron and that Front National candidate Marine Le Pen will lose in the second round of voting on 7th May whether she faces Macron or, in a more unlikely event, Fillon.

In the US, the Federal Reserve has kept its options open by broadly sticking to a narrative which pencils in three hikes in 2017, in line with my expectations.

With the Fed seemingly comfortable with the path of inflation and employment, the next big data hurdle is likely to be Q1 2017 GDP data for the US due out on 28 April.

Dutch national elections – Nationalists underperform, Labour Party implodes

The Dutch national elections for the 150-seat parliament have come and gone without causing the upset that many had feared (final official results are due to be published on 21st March). Specifically, based on preliminary results, the nationalist Party for Freedom led by Geert Wielders came second with an estimated 20 seats – a gain from 12 seats (see Figure 1). But this was well short of expectations based on recent polls showing 25% support and leaves the party a long way from being able to lead a ruling coalition let alone form a parliamentary majority (75 seats).

Prime Minister Rutte’s People’s Party for Democracy & Freedom remains the largest party, although its number of seats fell to 33 from 40, and it will now seek to form a new majority coalition with two or more parties, which are likely to include the Christian Democratic Appeal and Democrats 66 which each won 19 seats. It will likely not reunite with its former coalition partner – the Socialist Party – which suffered the biggest loss of all the parties by losing three-quarters of its 35 seats.

Dutch Courage Graph

This election result, along with the 30-year high voter turnout of about 80%, provide several important take-aways:

 

1) The Party for Freedom’s voice in Dutch politics has certainly grown louder but with only 13% of the seats in parliament it remains a modest opposition party. This would tend to support my view that while nationalist and/or populist parties in Europe are in the ascendancy, there has been a “tendency to over-estimate their reach and certainly their ability to dismantle the eurozone and/or European Union”.

 

Beyond Greece and Finland, which account for only 2.5% of the EU’s GDP, nationalist parties in Western Europe are still in opposition and often have only a small share of parliamentary seats. Ultimately, they will only be able to shape the future of their countries and potentially the eurozone and/or EU if they have true power, by holding a parliamentary majority, the presidency or both. The outcome of the Dutch elections lends support to my expectation that “nationalist parties may struggle to become a major political force” (see Black Swans and White Doves, 8 December 2016).
 

  • First, in many countries the electoral voting systems for the lower houses of parliament include thresholds and multiple rounds of voting which work against these smaller parties securing a significant number of seats.
  • Second, many of these smaller nationalist parties still do not have the political infrastructure in place at a national level, financing or depth of personnel to effectively challenge the bigger parties. The messy and reputation-sapping election of the relatively unknown Paul Nuttall as leader of the United Kingdom Independence Party (UKIP), following Nigel Farage’s resignation, is a point in hand. 
  • Third, voters are clearly rebelling against well-entrenched political players but may not always have fresh faces to elect. In the United States they elected an untested businessman with no political experience as President and in Italy the increasingly popular leader of M5S, Beppe Grillo, is a former comedian. However, in France for example, three of the four leading candidates in the Presidential elections due in April-May are old-school politicians who do not present a true break with the past. Marine Le Pen and Benoit Hamon joined the Front National and Socialist Party, respectively, 30 years ago, while François Fillon – the Republican Party candidate – is a former Prime Minister. Only Emmanuel Macron, who is running as an independent, could argue that he is a fresh face even if he was formerly a member of the Socialist Party and an Economy Minister under President Hollande.
  • Fourth, traditional centrist and centre-right parties are adapting to the new political, social and economic realities which they face and are unlikely to go down without a fight. They will have also learnt valuable lessons in the past 18 months, including the risk of calling a referendum. The demise of British Prime Minister Cameron and Italian Prime Minister Renzi following unsuccessful referendums will likely have made other EU leaders fearful of going down a similar route or of calling early elections.
  • Finally, while electorates are clearly using their votes to express their dissatisfaction with the economic and political status quo, there are still lines they seem unwilling to cross – namely the appointment of extreme-right candidates to the highest echelons of power (the recent Austrian presidential election, which saw Austrian Freedom Party’s candidate, Norbert Hofer lose, is a good example). Europe’s history arguably acts as stark reminder of the implications of electing a far-right leader.

 

2) The Dutch Socialist Party suffered a major loss of seats. Having been the second largest party in parliament, it is now only the seventh largest with 6% of the seats. The demise of the Dutch Labour Party echoes the struggles of the UK Labour Party under the leadership of Jeremy Corbyn and the downfall of the French Socialist Party under President Francois Hollande. The Socialist Party candidate for the French presidential elections, Benoit Hamon, is currently only fourth in opinion polls for the first round with 13% support and unlikely to make it to the second round run-off on 7th May (see Fed and 500 Godfathers, 10 March 2017).

 

3) The record high voter turnout in the Dutch elections, at the margin, seems to have diluted the vote for the Party for Freedom which had been expected to win about 35 seats. Conversely, high turnout appears to have helped partied which arguably occupy the centre of the political spectrum, specifically more traditional religious parties (Christian Democrats) and parties championing themes of education and innovation (Democrats 66) and the environment (Green Left and Democrats 66).

 

Voter turnout in French presidential elections has also historically been high in both the first and second rounds – above 78%. It is noteworthy that the only French presidential election won by a centrist candidate – Valéry Giscard d’Estaing of the Union for French Democracy (UDF) in 1974 – also had record-high turnouts of 83.5% and 86.2% respectively in the first and second round. Moreover, UDF presidential candidate François Bayrou came third with a respectable 18.6% in the first round of the 2007 elections – which had a high turnout of 82.6%. Similarly, UDF presidential candidate Raymond Barre came third (with 16.6%) in the first round of the 1988 elections – which had an above-average turnout of 79.7% (see The Ultimate Guide to the 2017 French Elections – Part I, 7 March 2017).

 

Dutch elections over, markets to turn their attention to French presidentials

The Dutch election result has, if anything reinforced my view that an above-average voter turnout – which is plausible in this year’s French presidential elections – would at the margin help centre-left candidate Emmanuel Macron and that Front National candidate Marine Le Pen will lose in the second round of voting on 7th May whether she faces Macron or, in a more unlikely event, Fillon.

Moreover, Socialist Party candidate Benoit Hamon, who is currently polling fourth on around 13% in the first round, is very unlikely to overtake Fillon and Macron to make it to the second round. He will be competing for left-wing voters with Far-Left party candidate Jean-Luc Mélenchon who is polling around 12% and has now met the constitutional requirement of having more than 500 sponsors.

The Conseil Constitutionnel confirmed on its website that as of 14th March, Mélenchon had 666 sponsors and is now one of eight candidates who meets this requirement to be a presidential candidate. Along with the top presidential candidates, Nicolas Dupont-Aignan and François Asselineau, both euro sceptic right-wing candidates, and Nathalie Arthaud, a left-wing candidate, will make it to the first round. But this is likely of limited consequence given that in aggregate these three candidates are currently polling only 3% (see Fed and 500 Godfathers, 10 March 2017).

 

A Dovish hike which gives the US Federal Reserve some room for manoeuvre

The Federal Reserve’s policy meeting on 15th March delivered the expected 25bp rate hike but ultimately kept a steady course which disappointed a slightly more hawkish market.

  • The updated dot-chart showed the median forecast of rate hikes for 2017 unchanged at 75bp, broadly in line with my view that it “may be a little premature for the 17 FOMC members to materially change their forecast for the appropriate pace of hikes for 2017” (see Fed and 500 Godfathers, 10 March 2017).
  • However, the weighted average of the 17 FOMC members’ forecast of the appropriate pace of rate hikes did inch up to 78bp from 74bp for 2017 and to 91bp from 86bp for 2018 (see Figure 2).
  • One of the ten voting FOMC members, Neel Kashkari, dissented against a rate hike. This was perhaps not totally surprising as Kashkari, the Minneapolis Fed President who became a voting member this year, was viewed as one of the more dovish members (see US Federal Reserve back in the limelight, 1 February 2017). However, it is notable that Charles Evans (Chicago Fed), arguably a long-standing dove, did not dissent against a rate hike.
  • The Fed’s statement was somewhat more confident about inflation hitting its target and importantly, in my view, made no reference to reasonably weak US wage and income growth.
  • Chairperson Yellen once against distanced Fed monetary policy from the somewhat still uncertain developments in the fiscal sphere.

The US rates market is now pricing in 13bp of hikes in June (i.e. a 50% or so probability of a 25bp hike) and a total of about 42bp of hikes for the remainder of the year. That pricing will likely sit reasonably comfortably with the Fed for now, in my view. Labour market data are seemingly providing few (negative) surprises to the Fed (or the market) but the first estimate of Q1 2017 GDP, due for release on 28th April, could be somewhat more of a game-changer for Fed policy meetings on 3rd May and 14th June.

 

Following the surge in the Philadelphia Fed Manufacturing Business Outlook Survey to a 33-year high of 43.3 in February, I had pointed to the possibility of a strong rebound in GDP growth in Q1 from a 1.9% quarter-on-quarter seasonally-adjusted rate in Q4 2016 (see Figure 3 in March Madness, 17 February 2017). However, the Federal Reserve Bank of Atlanta’s GDP tracker has growth slowing to 0.9% in Q1 based on data up till 16th March which would be the slowest pace of growth in a year. While the Fed will weigh up a long list of variables in coming months as well as possible details about President Trump’s fiscal plans, a halving of GDP growth in Q1 (from Q4 2016) would likely be enough for the Fed to pause at its May meeting. More significantly, it may be sufficient for the Fed to pause at its June meeting when it will also publish updated forecasts.

 

Olivier Desbarres

Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.

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