02 Mar 2017

The week ahead: Monday 6 March 2017

Philip Shaw

Chief Economist

The recent market mood has been one of optimism over the US economic outlook. Following Donald Trump’s Congressional address on Tuesday evening, equity markets rallied. Although the speech contained few policy details, markets appeared to cheer the more measured, even presidential, tone from the President.

Meanwhile, FOMC members have been talking up the prospect of an interest rate hike as early as the 15 March policy meeting. Rate expectations have firmed; two-year Treasury yields have reached their highest level since 2009 and markets are pricing in a three-in-four chance of a March hike. Equity markets seem relaxed, though; at the time of writing, the S&P 500 index sits at a record high, up nearly 1.5% since the start of the week.

As the 15 March FOMC meeting nears, two events will be under the spotlight. First, Fed Chair Janet Yellen will give a speech this Friday (3 March). And next Friday (10 March), the payrolls data will be published. Our forecast is that the Fed will wait until June before its next rate hike. But that expectation is at risk. If we see Chair Yellen hint at an imminent rate rise, and if the payrolls data show decent wage gains, a March move will look increasingly likely. Besides these events, there will be little ‘Fedspeak’ to watch out for as the FOMC enters its pre-meeting ‘blackout period’ from Saturday 4th.

The ECB will also be in focus next week with its policy decision on Thursday. President Mario Draghi is likely to fend off calls for any policy tightening in the face of rising headline rates of inflation (the inflation rate in Germany has reached 2.2%, a 4½-year high). Instead, President Draghi is likely to point out that underlying price pressures remain weak, with ‘core’ Eurozone inflation remaining stubbornly bound between +0.7% and +0.9% y/y for the past eleven months (see our preview, ‘ECB to remain on hold…’ for full details).

Other news from the Continent is likely to be political. We are drawing closer to the 15 March Dutch election, where the far-right PVV has a shot at becoming the largest party in parliament (although is very unlikely to be able to form a government). In France, the election campaign of the centre-right candidate, Francois Fillon, limps on as he faces a formal investigation over allegedly paying his wife for a ‘fake job’. The campaign might start looking like a two-horse race between the far-right Marine Le Pen and centrist Emmanuel Macron. M. Macron would be firm favourite to win in a run-off against Mme. Le Pen, but if his campaign stutters, the chance of a Le Pen presidency might rise. Such a prospect might push up on French bond yields and down on the Euro.

In the UK, Chancellor Philip Hammond will deliver the Budget on Wednesday (full preview forthcoming). We expect few fireworks though. Mr Hammond will benefit from a firmer economic outlook than at November’s Autumn Statement, but will likely err on the side of fiscal caution, so we expect few giveaways. Meanwhile, the passage of the Article 50 bill continues. The Lords have passed an amendment to guarantee the rights of EU citizens in the UK. That amendment now needs to be voted on by the Commons next week. While we still see the bill passing fairly smoothly, further legislative ‘ping-pong’ might threaten the government’s March deadline for triggering Article 50. On the data front, the big day is Friday with manufacturing, trade and construction numbers due. These data will inform our view on whether growth momentum is being sustained.

Finally, we note that China’s annual National People’s Congress kicks off on Sunday. It will probably be more low-key than last year, where a five-year plan was tabled. But we might get an update of the authorities’ economic targets. Any hints of tolerance for sub-6½% GDP growth would provide a further signal that the authorities are comfortable with some slowing in the economy as they look to tackle financial stability risks. CH

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