Good morning,
Polls in, VVD in
The Dutch elections have come and gone with the Liberal VVD party who were the senior party in the current coalition take the most seats. The far right threat of Geert Wilders seems to have been snuffed out however they did increase their share of the vote to attain 18 seats in this latest parliament.
While the PVV may look beaten and the euro is reacting as such, running higher across the board as the exit polls were announced, the crucial thing for longer-term EUR gains from the Dutch election is quick formation of neat and small coalition, not just beating the fascists.
Coalition building is of course no easy task and while the Dutch political system is set up for it given the last single party majority government was during the First World War, the last time the Netherlands had a four party coalition, it was the 70s and it took 5 months to put together. This was a much calmer time for European politics than we have now.
Risks to stability remain in Europe
As we have spoken about for months now, the Dutch election always had a short and a long term risk; short was the risk of a PVV win/outperformance and the market, erroneously, transposing that risk on to the upcoming French elections. The longer-term risk stems from dangers to EU solidarity amid Brexit negotiations and/or a fragile/weak coalition in one of Europe’s biggest economies.
For now, the saddest person in Europe will not be Geert Wilders but instead Marine Le Pen; she was the first foreign politician to congratulate Brexit campaigners on ‘taking back control’ and has frequently tied herself to Trump and his anti-status quo rhetoric. A win or good showing for Wilders will have added impetus to her campaign. Today it looks more difficult for her to win the Presidency although we have issues with the belief that one country’s vote can influence the voters in the other that readily.
It also calls into doubt the belief that the world is experiencing a ‘wave of populism’. Did Brexit win because of the £350m bus and did Trump triumph because of Hillary’s emails? I guess we will never know.
Fed hikes but dollar falls
It is not often that a Federal Reserve interest rate rise plays second string to news from the Netherlands but today is that day. Interest rates were increased by 25bps last night by the Federal Reserve in line with the market’s expectations. We’ve had hawkish hikes and dovish hikes and yesterday’s was more owlish than anything; there is a lot of water that needs to flow under the bridge before the judgement of the Federal Reserve shifts to price in a subsequent change in the US business cycle and the US is seen as running at strength.
There has been no change in the economic estimates and US economy watchers should be ready to see inflation rise above 2%. Today’s statement shows that the Fed expects that somewhat soon but is unconcerned about when and how it gets there.
As we said yesterday, the March hike is a tacit endorsement of the economic growth that we have seen in the past 6 months but a continuation of this positivity in line with market expectations will only stem from an increase in throughput from the Trump administration on taxes and infrastructure.
UK pay slips further ahead of BOE meeting
UK pay numbers showed further weakness in January according to numbers released yesterday. A couple of months ago, pay was growing at 2.7/2.8% on the year, that has now fallen to 2.2%. Inflation is heading in the other direction and if you agree with us that the official CPI number looks soft at 1.8% then it is not much of a stretch to think that real wages in the UK are already declining.
The latest Bank of England meeting is due at 12 noon today.
Have a great day