Wait-and-see central banks to play second fiddle to Trump
LONDON (Reuters) – US President Donald Trump will again be the center of attention in this week with any policy statements, having helped put the Federal Reserve, the Bank of England and other central banks in wait-and-see mode.
Trump, inaugurated as 45th president on January 20, pushed Republican lawmakers last 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% tax on goods from Mexico to pay for the wall, sending the peso tumbling and deepening a crisis between the two neighbors.
“Markets will be focused on whether he [Trump] continues to show a high degree of commitment to implementing his preelection promises and whether he gets onto 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 Reuters poll of hundreds of economists taken earlier this month.
Trump has already withdrawn from the Trans-Pacific Partnership (TPP) and threatened to renegotiate – or even scrap – the North Atlantic Free Trade Agreement (NAFTA) with Mexico and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, policy makers signaled as many as three increases in 2017.
But no hike is expected on Wednesday, and rates will remain at 0.50% to 0.75% until the second quarter, when another 25-basis-point rise is likely, a Reuters poll found.
Strong labor-market data, due on Friday, would lend credence to those expectations for a second-quarter hike. A Reuters poll predicts a pickup in nonfarm payrolls.
EUROPE
The European Central Bank 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% target.
Euro-zone inflation rose to 1.5% this month, flash data are expected to show on Wednesday, still a long way from the target. Germany’s is expected to rise to 2%.
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,” said Achilleas Chrysostomou at Standard Chartered. “Oil is the main factor behind rapidly rising inflation. Brent crude was about 65% higher year-on-year in January 2017.”
An increase in euro-zone manufacturing is also expected to be confirmed with the release of purchasing managers’ indexes.
BREXIT BITE
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 last Thursday.
Gross domestic product rose at a quarterly pace of 0.6% in the October-December period, keeping up the same above-average pace seen in the initial three months after the referendum decision to leave the European Union.
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 the end of March.
“The Bank of England is expected to leave rates on hold [this] 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. “Certainly the recent data flow has been strong and inflation is on the rise. But there are tentative signs of a slowdown in employment growth, while business surveys suggest a growing sense of caution surrounding Brexit.”
A recent Reuters poll suggested the BoE would leave its record-low interest rates and other stimulus measures unchanged at least until 2019. All but one of the 67 economists surveyed said there would be no tweaks in the next policy announcement on Thursday.
The BoE will also publish its quarterly inflation report.
The Bank of Japan, the Central Bank of Kenya and the Central Bank of Russia all have policy decisions, but none are expected to move. China continues celebrating its Lunar New Year, so there will be little news from the world’s second-largest economy.