13 Jan 2017

The week ahead: Monday 16 January 2017

Philip Shaw

Chief Economist

This week’s major global event was the first post-election press conference held by US President-elect, Donald Trump. Investors hoping for an endorsement of the ‘Trump reflation trade’, based on large scale US fiscal stimulus, were left disappointed by Wednesday’s event.

  • Rather than laying out a growth-boosting economic plan, the President-elect focused much of his attention criticising what he called the “fake news” media and even (not for the first time) the US intelligence agencies. With Mr Trump setting out such a bellicose stall, the trade-weighted dollar index dropped to its lowest level for a month, as did the US ten-year treasury yield. Meanwhile, the price of gold rose to a two-month high. This does not mean that the ‘Trump reflation trade’ is over – we note that US stocks actually rose on the day of the press conference, after an initial wobble. And, looking further ahead, we do see the incoming Trump Administration opening the fiscal taps. But this week is a reminder that the Trump Presidency also brings with it downsides as far as investor risk appetite is concerned. Next Friday (20 January) is the big day where Mr Trump is formally inaugurated – markets will be watching out for signals on what sort of Administration begins to take shape.

  • Elsewhere in US policy, we might get a further steer on how the Federal Reserve sees the outlook for interest rates. With a number of FOMC members coalescing around the call for three rate hikes this year (we expect a more modest two) we will be watching Chair Janet Yellen’s speeches on Wednesday and Friday with interest. In terms of the data, CPI and industrial production numbers will be released on Wednesday. We will also be looking out for whether the January Empire State (Tuesday) and Philly Fed (Thursday) manufacturing surveys hang onto sharp post-election gains – cue valedictory tweets from the President-elect if so.

  • At home, Brexit news will rumble on. First, PM Theresa May has announced a ‘major’ speech on Brexit on Tuesday which will almost certainly have implications for sterling. Second, there is a High Court hearing on whether the Government needs to give one year’s notice before leaving the European Economic Area (EEA) (over and above the process for leaving the EU). Essentially, the question is whether the Government needs to trigger Article 127 of the EEA Agreement (over and above Article 50 of the Lisbon Treaty). This might add a further complication to the Brexit process.

  • The BoE’s Mark Carney will speak on Monday. On monetary policy, Governor Carney will probably set a high bar for shifting away from the MPC’s ‘neutral policy stance’ – ie looking to keep Bank Rate at 0.25% to guard against Brexit headwinds in the face of rising inflation. Next week’s data might give us a steer on how the growth/inflation trade-off is evolving, with CPI numbers on Tuesday, followed by labour market data on Wednesday. We only expect a slight rise in inflation for now though (from +1.2% to +1.3%), with sharper rises to come later this year.

  • Elsewhere in Europe, the main event will be the ECB policy decision on Thursday (see preview below). We expect to hear little new on the policy outlook, but we wonder how President Draghi will respond to recent rises in headline in inflation rates.

  • On the global stage, the World Economic Forum annual meeting kicks off in Davos on Monday. It is difficult to see what credible solutions world leaders will find to key global issues, such as the rising tide of populism, at the Swiss ski resort. However, we do note that Xi Xinping will be the first Chinese Premier ever to attend.

  • And on China, we note that Q4 GDP data will be published on Friday. Our central view is for signs of a gentle slowdown and economic rebalancing process to continue and for GDP growth to sit within the authorities’ target range of 6.5-7.0%. CH

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The week ahead: Monday 16 January 2017