09 Dec 2016

The week ahead: Monday 12 December 2016

Philip Shaw

Chief Economist

Two Italians took centre stage in the global arena this week – Matteo Renzi and Mario Draghi. Mr Renzi, the Italian Prime Minister, tendered his resignation on Wednesday following the crushing defeat of his proposed constitutional reforms in Sunday’s referendum.

Mr Renzi will continue as PM for now as a caretaker until a solution is found on next steps. The emerging view is that fresh elections should take place next year, possibly in February. So on top of the French and German elections to be held next spring and autumn respectively, yet another source of uncertainty has been injected into the European political calendar.

Although a defeat for Mr Renzi and his subsequent resignation was widely expected, we nevertheless think that markets showed a remarkably sanguine response. Following a day of mild jitters on Monday, Italian bond yield spreads over Bunds (a risk premium proxy) have actually fallen materially below levels seen last month. And after an initial knee-jerk decline, the euro actually rallied following the vote. A pattern could be emerging: following the Brexit vote in June, Donald Trump’s election victory in November and now the Italian referendum, markets and economies have (so far, with the notable exception of sterling) shown a surprising degree of resilience to political shocks.

The ECB President, Mario Draghi, made some significant announcements at this week’s ECB meeting. The ECB’s Governing Council (GC) announced an extension of the QE programme by nine months, taking the proposed end-point from March to December next year, albeit at a reduced asset purchase pace of €60bn a month from the current €80bn as of next April. The GC also loosened its QE purchase rules, allowing it to buy bonds with yields below the -40bp deposit rate while also permitting the purchase of bonds for maturities between 1 and 2 years (extending the existing 2-30 year range). That, alongside Mr Draghi’s pronouncement that ‘tapering’ of the QE programme has not been discussed by the GC, confirmed a dovish stance.

The big central bank event next week (Wednesday evening) comes from the US Federal Reserve. The near universal expectation is that the Fed will raise the Federal funds target rate range from 0.25-0.50% to 0.50-0.75%. Such a move is firmly priced in though, so market reaction might hinge more on FOMC members’ medium term rate expectations, as outlined in the ‘dot plot’, and on Chair Janet Yellen’s press conference. Elsewhere in central banking, Thursday will see the Bank of England making its policy decision. Here we would be surprised to see any major headlines with the MPC set to vote unanimously for no policy changes (our full preview will be released on Monday). The Swiss National Bank and the Norges Bank also make policy decisions on Thursday.

On the home front, senior politicians will be out in force. Chancellor Philip Hammond will face the Treasury Select Committee on Monday to discuss the Autumn Statement. On Thursday and Friday the EU will hold its end-of-year leaders’ summit. PM Theresa May will be attending – we will be watching for any developments in her framing of the Brexit debate as well as the response of other EU leaders.

Besides the flurry of central bank and political events, the data calendar will be busy too. In the UK we will get further steers on the health of the post-Brexit economy and the extent to which inflation is rising as a result of post-referendum falls in the pound. Here, the two key releases will be CPI on Tuesday and labour market numbers on Wednesday.

Other major releases from around the world next week include Chinese industrial production (Tuesday), the Eurozone ‘flash’ PMIs and US CPI (both on Thursday). Big surprises here could move markets in an otherwise jam-packed week. CH

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The week ahead: Monday 12 December 2016