18 January, 2017
European Outlook: Stock markets continued to stabilise during the Asian session, and the Nikkei closed with a 0.43% gain as the Yen retreated and markets started to shake off the most recent Trump jitters while the Dollar stabilised. Hong Kong outperformed and most Chinese shares gained amid speculated state intervention to ensure more stability as President Xi Jinping visits Davos for the World Economic Forum. U.S. and U.K. stock futures are also higher. The FTSE 100 underperformed yesterday as the Pound bounced back from recent lows, following May’s Brexit speech, but Sterling is already retreating again and this is helping the FTSE to win back lost ground, which could see yields picking up again today, especially as the Bund future already started to come off highs going into yesterday’s close and today’s final German and EMU inflation data for December and UK labour data. Oil held over $52 and GOLD continued in positive mood around the key $1212 level.
German HICP confirmed at 1.7% y/y, as expected, with prices up 1.0% m/m. The sharp acceleration from just 0.7% y/y in November was mainly due to base effects from lower energy prices and the breakdown showed that prices for heating oil jumped 21.9% y/y in December, after still falling -6.7% y/y in the previous month. Petrol prices rose 6.0% y/y, after falling -2.2% y/y in December. Still, even excluding household energy and petrol, the annual rate jumped to 1.6% from 1.2% in November and the data will back the critics of Draghi’s expansionary policy in Germany. The Eurozone headline rate, due later today, remains lower, but at 1.1% has also been trending higher – at least for now. But with growth picking up and the labor markets improving, there is the risk of second round effects, especially in areas where wage indexation still remains in place.
UK PM May Speech: UK PM confirmed that Brexit really does mean Brexit, setting a course for the UK to make a “clean” break from the EU, meaning a departure from single market membership and the customs union. That is the bottom line from her long-awaited, platitude -laden (Britain to be “truly global … profoundly internationalist” etc etc) keynote speech that is laying the government’s four principles and 12 negotiation priorities for Brexit. Among the highlights, May confirmed that the Brexit deal will be subject to parliamentary approval, which should not be too much of a surprise but has still gone down well in markets, sparking a rally in the pound, which has built on gains seen after hotter than expected UK inflation data earlier. Cable rallied by 3% at seven week highs above 1.2400, putting in some distance from Mondays’ three-month lows that were seen just under 1.2000.
US Data: The Empire State headline drop to 6.5 trimmed the December surge to an 8-month high of 7.6 (was 9.0) from 2.2 (was 1.5) in November and a pre-election -5.5 (was -6.8) in October, leaving a big net climb despite the January setback. And, the component data beat estimates to leave an ISM-adjusted Empire State rise to 50.7 from 48.8 (was 48.9) in December, 47.3 (was 47.2) in November, and 46.9 (was 46.3) in October, with small annual revisions that did little to alter the trajectory. We expect a January Philly Fed drop-back to 14.0 after the December spike to a 2-year high of 19.7, a Richmond Fed drop to 7.0 from 8.0, a Dallas Fed rise to 16.0 from 15.5, a Chicago PMI rise to 55.0 from 54.6, an ISM downtick to 54.5 from a 2-year high of 54.7, and an ISM-NMI downtick to 57.0 from a 1-year high of 57.2 over the past two months. The mix should allow the ISM-adjusted average of the major surveys to rise to a 2-year high of 54 in January from 53 in November and December, 51 in October and 50 in August and September.
FedSpeak: Fed governor Brainard said more rapid rate hikes are likely if fiscal policy changes quickly eliminate labor market slack, but a gradual path of rate hikes will be appropriate so long as inflationary pressures are muted. She sees fiscal change that persistently raises aggregate demand alone could reduce the ability of fiscal policy to respond to future shock. Brainard views risks for the domestic economy as closer to balanced than they have been in a long time, while full employment remains in reach and could be sustainable with the right policy mix. Like the risks she cites, her views are pretty balanced. NY Fed dove Dudley is optimistic about the U.S. expansion, expecting it to continue, though “long in the tooth.” He doesn’t think Fed action will snuff out the expansion anytime soon as inflation is not a problem. He sees pressure on labor resources increasing, but quite slowly, while dollar strength will pressure import prices lower and limit domestic producers from raising prices. Dudley sees household finances in unusually good shape at this stage in the cycle, while challenges in retail are not due to aggregate demand but changing consumer demands.
Davos Speak: (from BBC) IMF managing director Christine Lagarde will discuss Squeezed and Angry: How to Fix the Middle Class Crisis along with renowned economist Larry Summers who served in the Obama administration. Government ministers from UAE, Egypt and Tunisia will examine The Future of Arab Economies. Economists Kenneth Rogoff, Joseph Stiglitz and Larry Summers are part of a discussion on Economics for the Global Commons. Pierre Moscovici, the European Commissioner for economic and financial affairs, taxation and customers will be involved in a discussion on The European Disunion. Joe Biden, US VP for just two more days, will give a special address at the forum this morning. And in the afternoon Al Gore will talk about climate change. Of interest will be an interview with Jack Ma, founder of China’s internet giant Alibaba.
Main Macro Events Today
Yellen Speech – (20:00 GMT) – “The Goals of Monetary Policy and How We Pursue Them” at the Commonwealth Club, in San Francisco. Possible policy implications ahead of Trump inauguration on Friday.
US CPI – The December headline CPI is expected to grow 0.3%, while the core index rises 0.2%.Forecast risk: downward, as oil prices gave up some of their gains in November.Market risk: downward, as inflation undershoots may affect the timing of additional rate hikes. Energy prices are expected to remain flat, with a 1% gasoline price increase. Food prices have risen by 0.1%-0.4% per month over the past three years, though the drought in California had an upward effect with last year’s 0.5% May rise being the largest since August of 2011.
BOC Rate Decision – The consensus outlook is no change to the 0.50% rate setting today alongside a cautiously constructive view of the growth and inflation outlook. The base-case policy assumption remains for no change in rates this year, followed by an eventual shift to modest rate increases by the middle of 2018.
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