27 Mar 2017

The week ahead: Monday 27 March 2017

Philip Shaw

Chief Economist

This week saw a wobble in the ‘Trump reflation trade’. On Tuesday (21 March) the S&P 500 saw its biggest daily fall (1.2%) since October. Bonds rallied such that the 10-year Treasury yield has dropped to around 2.4%, 10bps below Monday’s levels and 20bps below levels seen before the FOMC’s ‘dovish hike’ the previous week. Meanwhile, the greenback fell to, and remains around, multi-week lows.

The immediate trigger appears to have been the rocky introduction of the Administration’s plans to ‘repeal and replace’ Obamacare. At the time of writing (Thursday 23), President Trump’s American Health Care Act is set for a vote in the House of Representatives amid opposition from both moderate and conservative wings of the Republican Party. There is a real chance that President Trump will lose the vote and, even if he wins, a Senate vote (which would likely be held next week) will see even stronger resistance. Lengthy legislative battles on healthcare might start to raise serious questions about the possibility of passing much in the way of fiscal stimulus, on which the Trump trade hinges.

The Trump trade has certainly not unravelled though. While the S&P 500 now sits 2% below its 1 March (record) closing level, it is still 11% up on its early November level. Further wrangling on healthcare over the coming week might turn out to be a big driver of market sentiment. We also note a couple of US data releases to watch out for – the 3rd estimates of Q4 GDP will be published on Thursday and inflation numbers are published on Friday.

In Europe, Brexit will take centre stage next week. Following an EU Summit to celebrate the 60th anniversary of the Treaty of Rome (essentially, the foundation of the EU), the UK government will trigger Article 50 via a letter to the European Council President, Donald Tusk. Mr Tusk has promised to respond to the UK government and to send a letter to EU27 countries outlining a ‘draft Brexit framework’ by Friday 31st. The tone of this process might have implications for sterling markets, as might a Scottish Parliament vote on Tuesday (postponed from Wednesday 22) on whether to support a second independence referendum. On the data front, we expect third estimates of Q4 GDP to confirm the UK’s surprising economic resilience towards the end of last year. In fact, sectoral data revisions mean that we expect the Q4 GDP growth estimate to be nudged up from +0.7% to +0.8% q/q. But we think the real challenge lies ahead, as rising inflation over the course of this year will, in our view, lead to a slowdown in growth. Timelier indicators such as mortgage approvals (Tuesday) and Nationwide house prices (expected during the week) might provide evidence of this.

In the Eurozone, the focus might centre on official responses to the UK’s triggering of Article 50. Also on the political front, a German state election (for Saarland) will take place. Just like the Federal government, Saarland is governed by a ‘grand coalition’ led by the centre-right CDU, supported by the centre-left SPD. The Saarland vote might provide a microcosmic insight of how the national mood might be shifting towards the SPD who, led by the popular Martin Schulz, might stand a chance of beating Angela Merkel to the Chancellorship at the 24 September Federal election. The key Eurozone data release will be the March CPI data. Although the headline inflation rate has now reached 2%, the ‘core’ rate still sits below 1% - a pickup here is a key condition that needs to be met before the ECB considers tightening monetary policy.

Finally, we note that the official Chinese PMI data will be published in the early hours of Friday. Indicators from the Chinese economy, including the PMIs, have been fairly buoyant of late. With the big political events taking place on both sides of the Atlantic, it would take a major shock here to rattle markets.

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The week ahead: Monday 27 March 2017