US Fed, Bank of England in waitand-see mode
Focus on Donald Trump’s policy statements
US PRESIDENT Donald Trump will again be the centre of attention in the coming week with any policy statements, having helped put the Federal Reserve, Bank of England and other central banks in waitand-see mode.
Trump, inaugurated as 45th president on January 20, pushed Republican lawmakers on Thursday for swift action on a sweeping agenda, including his planned US-Mexico border wall, tax cuts and repealing Obamacare.
The White House also floated the idea of imposing a 20 percent tax on goods from Mexico to pay for the wall, sending the peso tumbling and deepening a crisis between the two neighbours.
“Markets will be focused on whether he (Trump) continues to show a high degree of commitment to implementing his pre-election promises and whether he gets on to detailing his fiscal plans,” said Victoria Clarke at Investec.
A rise in protectionist trade policies is the biggest risk facing the global economy, according to a poll of hundreds of economists taken earlier this month. Trump has already withdrawn from the Trans-Pacific Partnership and threatened to renegotiate – or even scrap – the North Atlantic Free Trade Agreement with Mexico and Canada.
In contrast, speculation Trump will enact bold stimulus and reflationary measures has pushed up US 10-year Treasury yields, lit a fire under the dollar and sent the Dow Jones Industrial Average above the 20 000 mark for the first time.
Last month the Fed added 25 basis points to borrowing costs, only its second hike since the Great Recession and a year since the first one. At the time, policymakers signalled as many as three increases in 2017.
But no hike is expected on Wednesday and rates will remain at 0.50 to 0.75 percent until the second quarter, when another 25-basis-point rise is likely, a poll found.
Credence
Strong labour market data, due on Friday, would lend credence to those expectations for a second quarter hike. A poll predicts a pick-up in non-farm payrolls.
The European Central Bank (ECB) has had an ultra-loose monetary policy for years, with little chance of any change in the foreseeable future, as it has so far failed to get inflation anywhere near its close to 2 percent target.
Euro zone inflation rose to 1.5 percent this month, flash data are expected to show on Wednesday, still a long way from target. Germany’s is expected to rise to 2 percent.
But ECB President Mario Draghi has remained relatively comfortable about upward movements and relaxed about German calls for tighter policy as its inflation rate climbs.
“We expect inflation releases due this week from several countries to show prices are accelerating further. Oil is the main factor behind rapidly rising inflation; Brent crude was about 65 percent higher year-on-year in January 2017,” said Achilleas Chrysostomou at Standard Chartered.
An increase in euro zone manufacturing is also expected to be confirmed with the release of purchasing manager indexes.
A slowdown in growth in Britain’s dominant service industry and among its manufacturers during January, after they finished 2016 strongly, is expected to be reported by Britain’s purchasing managers’ indexes.
Britain’s free-spending consumers again confounded warnings that June’s Brexit vote would cause an immediate slowdown in the country’s economy, driving robust growth in the final three months of 2016, data showed on Thursday. Gross domestic product rose at a quarterly pace of 0.6 percent in October-December, keeping up the same above-average pace seen in the initial three months after the referendum decision to leave the E U.
Curtail growth
But economists have warned booming inflation and uncertainty around the terms of Britain’s divorce from the EU could curtail growth rates this year. Prime Minister Theresa May has said she will trigger Article 50, starting the twoyear countdown to leaving, by end-March.
“The Bank of England is expected to leave rates on hold next week and is likely to retain its position that a rate hike is just as likely as an interest rate cut,” said James Knightley at ING. A recent poll suggested the bank would leave its record-low interest rates and other stimulus measures unchanged at least until 2019. – Reuters
Euro zone inflation rose to 1.5 percent this month, flash data are expected to show on Wednesday.