19 Dec 2016

The week ahead: Monday 19 December 2016

Philip Shaw

Chief Economist

The calendar for the week ahead is looking thinner than usual in the pre-Christmas week. But markets have not quietened yet with the USD on the up on the idea that the Fed is moving onto a faster path of normalisation. The trigger was the Fed adding an extra 25bp rate hike to its ‘dot plot’ of the appropriate path for rates (so it has three hikes in total in 2017) at its policy gathering this week.  

  • Our view is that the shift in the ‘dot plot’ reflected the view of a few FOMC members and not the Fed chief herself. A Dr Yellen led Fed is not likely to rush into a re-write of its monetary policy plans before it has further detail on how much of Donald Trump’s fiscal easing can be passed through Congress. We don’t expect clarity until well into 2017 such that the Fed could struggle to factor in three 2017 increases; our forecast is for two. Furthermore, the Fed has overestimated the pace of tightening in recent ‘dot plots’; it had four increases for 2016 at this point last year whilst we have had just one. From 2018, the policy path looks more open with Dr Yellen likely to be replaced when her term ends at the start of that year. But even then it would take a brave Fed chief to go all guns blazing on policy tightening, taking the steam out of ‘Trumponomics’. We continue to forecast three rate rises in 2018, taking the Fed funds target rate range to 1.75-2.00%.

  • Staying with the US, there is a string of pre-Christmas economic releases due out including the ‘final’ Q3 GDP estimate, personal income and spending data for November and various housing market releases too (FHFA, new home sales, existing home sales).

  • UK economic releases feature heavily in the week ahead calendar, with the 3rd estimate of UK GDP, Q3 current account numbers, public finances for November and December’s GfK consumer confidence readings all due. The ONS has made numerous revisions to its trade numbers over recent weeks, which are likely to impact the so-called expenditure contributions to GDP, though not growth itself. In terms of the latest Q3 estimate, we look for no change on the second estimate with GDP still estimated to have expanded by 0.5% on the quarter. Finally in the UK, note that PM Theresa May is set to be questioned by Parliament’s Liaison Committee on Tuesday afternoon on Brexit. Any policy steers including how much importance the PM is placing on maintaining single market access, could be important for the pound.

  • In the Eurozone, data releases are much thinner on the ground next week with Germany’s IfO survey on Monday morning the highlight, providing a useful update on the health of the Eurozone’s largest economy, whilst ‘final’ French GDP numbers for Q3 are due too. Even as we move towards Christmas we expect the focus on Italy to remain, with Monti dei Paschi di Siena (MPS) attempting to recapitalise before its year-end deadline, whilst sources quoted on Reuters are saying that the Italian government is ready to intervene with €15bn to recapitalise ailing banks, including MPS.

  • Finally, note that we have little broader global data due out. Japan is set for a shortened week with a public holiday on Friday.

  • On the central bank announcements front, the Bank of Japan is due to deliver its policy decision on Tuesday morning, with talk of an upgrade to its economic assessment. Sweden’s Riksbank is due to make its latest policy announcement on Wednesday morning. VC

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The week ahead: Monday 19 December 2016