The week ahead: Monday 20 February 2017

17 Feb 2017

Philip Shaw

Chief Economist

Optimism about the US economy has been a key theme this week. The optimism came on three fronts. First, markets likely saw some carry-over from Donald Trump’s recent comments promising something ‘phenomenal’ on tax in the coming weeks. Second, the US data this week have been strong, ranging from the consolidation of a post-election surge in NFIB small business optimism to a material upside surprise for retail sales.

Third, Fed Chair Janet Yellen’s Congressional testimony pointed to a buoyant outlook, leaving the prospect of a rate hike as early on March on the table. Equity markets shrugged off fears about the Fed becoming unduly hawkish though – at the time of writing, all four of the main US equity indices were sitting close to record highs, with the S&P 500 index up over a per cent this week.
Looking to the week ahead, the US data flow will be lighter, as will the flow of high profile Fedspeak. Any key drivers of risk sentiment from across the pond will likely to relate to pronouncements from the Trump Administration, particularly those relating to fiscal policy.
Developments in Europe will likely be in the spotlight in the coming week. A key event will be Monday’s Eurogroup meeting of eurozone finance ministers. Previously, the intention had been for this meeting to see the signing of a deal for Greece to secure further cash disbursements under its bailout programme. But, given a significant divergence of views among the key players (the Greek government, the European creditors and the IMF) such a deal now looks impossible. With large Greek debt repayments due in July, the best we can hope for at this stage is at least a little more clarity on the way forward (see our note 'Greece still pushing a Sisyphean boulder' for a full report).
On the eurozone data front, the key release will be the ‘flash’ PMIs for February, due out on Tuesday. These much-watched surveys have pointed to a fairly robust pace of activity of late and we expect that to continue. On Wednesday, final inflation estimates for January should confirm CPI inflation moving northwards. But we note that the ECB is still sticking to its pre-announced policy plans (i.e. a continuation of the QE programme until December, with the monthly purchase pace stepping down from €80bn to €60bn in April.
As the UK Parliament returns from a week-long recess, we should see more Brexit-related developments. In particular, the Article 50 bill, which passed resoundingly and un-amended through the House of Commons last week, finds its way into the Lords. We would not rule out some political to-ing and fro-ing over the bill at this stage, but our central case is for a fairly smooth process, with the government on course to trigger Article 50 by the end of March.
Another key UK political date for the diary is on Thursday, with by-elections for the Copeland and Stoke-on-Trent Central by-elections – two Labour seats. The bookies firmly expect the Tories to snatch Copeland, while Labour might be given a run for its money by UKIP leader Paul Nuttall in Stoke. If Labour loses both, that might have profound implications for the leadership of Jeremy Corbyn.
Finally in the UK, we note that the key piece of data will come in the form of the second estimate of Q4 GDP. Our expectation is that Q4 growth will be revised up from +0.6% to +0.7% q/q – that would provide further confirmation of the much stronger-than-expected performance of the UK economy following the EU referendum. CH

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The week ahead: Monday 20 February 2017