Like many, we recognize that political factors may overshadow
macroeconomic drivers in shaping the investment climate in the period ahead. We suspect this will be very much the case in the coming days It is not that the economic data doesn’t matter, but for many investors, the imprecision and quirky nature of
the high frequency economic data pale in
comparison to the risks emanating from politics and policy.
macroeconomic drivers in shaping the investment climate in the period ahead. We suspect this will be very much the case in the coming days It is not that the economic data doesn’t matter, but for many investors, the imprecision and quirky nature of
the high frequency economic data pale in
comparison to the risks emanating from politics and policy.
Before
providing a thumbnail sketch of the five events,
we think may shape the investment climate in the week ahead, allow us to briefly preview the economic highlights. The US and Japan round out the large
countries industrial output reports. Europe accelerated. Japan is
will likely confirm the strongest monthly increase since March 2014. US
industrial output is expected to have snapped back from a weak November.
The soft patch the dragged it lower for three of the past four months
through November may have ended.
providing a thumbnail sketch of the five events,
we think may shape the investment climate in the week ahead, allow us to briefly preview the economic highlights. The US and Japan round out the large
countries industrial output reports. Europe accelerated. Japan is
will likely confirm the strongest monthly increase since March 2014. US
industrial output is expected to have snapped back from a weak November.
The soft patch the dragged it lower for three of the past four months
through November may have ended.
The US, UK, and
Canada report inflation measures. UK inflation is expected to have
stabilized at higher levels, though PPI may continue to trend higher. US
headline CPI is expected to continue to converge with the core rate, as is repeatedly done for the past fifty years.
It is expected to push through 2.0% for the first time since July 2014.
The core rate is expected to tick up to 2.2% from 2.1%. Canada’s
CPI has averaged 1.4% this year and 1.1% in 2015. It is expected to
rebound from 1.2% in November to 1.7% last month.
Canada report inflation measures. UK inflation is expected to have
stabilized at higher levels, though PPI may continue to trend higher. US
headline CPI is expected to continue to converge with the core rate, as is repeatedly done for the past fifty years.
It is expected to push through 2.0% for the first time since July 2014.
The core rate is expected to tick up to 2.2% from 2.1%. Canada’s
CPI has averaged 1.4% this year and 1.1% in 2015. It is expected to
rebound from 1.2% in November to 1.7% last month.
Investors will
get an update the UK labor market, which has lost some momentum in recent
months, and average weekly earnings that appear to have steadied. Australia reports December
employment figures. It created almost 25k jobs a month in 2015 and less
than a third of that in 2016. It reported an
outsized 39.1k job growth in November. These were all
full-time jobs. Economists expect a 10k increase in December, which seems
optimistic. Canada reports November retail sales. The 1.1% jump in
October (1.4% excluding autos) is obviously unsustainable. The risk seems to be
on the downside of the Bloomberg median forecast of 0.5%.
get an update the UK labor market, which has lost some momentum in recent
months, and average weekly earnings that appear to have steadied. Australia reports December
employment figures. It created almost 25k jobs a month in 2015 and less
than a third of that in 2016. It reported an
outsized 39.1k job growth in November. These were all
full-time jobs. Economists expect a 10k increase in December, which seems
optimistic. Canada reports November retail sales. The 1.1% jump in
October (1.4% excluding autos) is obviously unsustainable. The risk seems to be
on the downside of the Bloomberg median forecast of 0.5%.
Now, let’s turn
to the five key events:
to the five key events:
5. Bank
of Canada meeting and updated economic assessment: The overnight rate will remain
unchanged at 0.5%, and the anticipation
of closing the output gap in mid-2018 also won’t be altered. However, we flag
this because we expect a more upbeat tone to the central bank’s neutrality.
Also, we suspect that in the US
dollar appreciation that we expect to resume shortly, investors will also look
for alternatives to the greenback and the
Canadian dollar is a potential candidate. The Canadian dollar was the
strongest of the major currencies against the US dollar in 2016, gaining almost
3%. The US dollar has been sold from CAD1.36 on December 30 to nearly CAD1.30
on January 12. The US two-year premium has fallen from nearly 48 bp to
39 bp at the end of last week. It is approaching the lower end of a range (~35 bp) that has been sustained since the middle of November.
The US premium had risen steadily from below six bp last-July.
The US 10-year premium more than doubled from last April’s 32 bp
to 81 bp peak in late-November. It has subsequently pulled back and has
not been above 70 bp since January 4.
of Canada meeting and updated economic assessment: The overnight rate will remain
unchanged at 0.5%, and the anticipation
of closing the output gap in mid-2018 also won’t be altered. However, we flag
this because we expect a more upbeat tone to the central bank’s neutrality.
Also, we suspect that in the US
dollar appreciation that we expect to resume shortly, investors will also look
for alternatives to the greenback and the
Canadian dollar is a potential candidate. The Canadian dollar was the
strongest of the major currencies against the US dollar in 2016, gaining almost
3%. The US dollar has been sold from CAD1.36 on December 30 to nearly CAD1.30
on January 12. The US two-year premium has fallen from nearly 48 bp to
39 bp at the end of last week. It is approaching the lower end of a range (~35 bp) that has been sustained since the middle of November.
The US premium had risen steadily from below six bp last-July.
The US 10-year premium more than doubled from last April’s 32 bp
to 81 bp peak in late-November. It has subsequently pulled back and has
not been above 70 bp since January 4.
4:
China’s President Xi goes to Davos: This will be the first time a Chinese
President attends Davos. It is part of an important and ironic
juxtaposition that appears to be unfolding. It will be Chinese “core”
leader that will defend globalization from the populism and protectionism that
appears to be on the rise in the United States and Europe. The shoe has
been on the other foot for years. Chinese nationalism was worrisome for
many. It was China’s reluctance to free-trade rules embodied in the WTO
agreements that was the cause of much trade friction. Meanwhile, the
price of stabilizing the economy has been a
continued increase in credit extension. At the same time, capital
controls have been tightened stem the outflows. The painful squeeze
inflicted in the offshore yuan market continues to deter speculation as CNH is
trading at its largest premium (rather than the more usual discount) for the
longest period under this dual currency regime.
China’s President Xi goes to Davos: This will be the first time a Chinese
President attends Davos. It is part of an important and ironic
juxtaposition that appears to be unfolding. It will be Chinese “core”
leader that will defend globalization from the populism and protectionism that
appears to be on the rise in the United States and Europe. The shoe has
been on the other foot for years. Chinese nationalism was worrisome for
many. It was China’s reluctance to free-trade rules embodied in the WTO
agreements that was the cause of much trade friction. Meanwhile, the
price of stabilizing the economy has been a
continued increase in credit extension. At the same time, capital
controls have been tightened stem the outflows. The painful squeeze
inflicted in the offshore yuan market continues to deter speculation as CNH is
trading at its largest premium (rather than the more usual discount) for the
longest period under this dual currency regime.
We had argued that just like Bush and Obama backed
off their campaign pledges to cite China as a currency manipulator when they
assumed office. Our
forecast that Trump would also back off his pledge to cite China on day one was also bluster is coming to pass. In an interview in the Wall Street Journal, the President-elect
says it won’t be day one. He will talk to them first. Revealing
either his reluctance to take language seriously
or a subtle slight to China, Trump referred to President Xi as chairman. It
would be like calling a US president Commander. It is a title they have
but not this purpose. Alternatively, it could be a jab that Xi is not elected.
More antagonistic to the Chinese, Trump said he is not committed to the US traditional one-China policy. He
claimed it was up for negotiations.
off their campaign pledges to cite China as a currency manipulator when they
assumed office. Our
forecast that Trump would also back off his pledge to cite China on day one was also bluster is coming to pass. In an interview in the Wall Street Journal, the President-elect
says it won’t be day one. He will talk to them first. Revealing
either his reluctance to take language seriously
or a subtle slight to China, Trump referred to President Xi as chairman. It
would be like calling a US president Commander. It is a title they have
but not this purpose. Alternatively, it could be a jab that Xi is not elected.
More antagonistic to the Chinese, Trump said he is not committed to the US traditional one-China policy. He
claimed it was up for negotiations.
3. May’s
Brexit strategy: When May became Prime Minister there was a
small window of opportunity to change the trajectory. She could have said
she was not bound by Cameron’s pledge to adhere to the results of the
referendum. May’s government has not been bound by other policies of the
previous Tory government. She could have said that the referendum was
non-binding and why pretend otherwise.
It won with the slightest of majorities, which was not to make such an
important decision as changing a treaty. With Labour having inflicted on
itself serious injury, she could have won an election if she lost a vote of
confidence. Instead, she went with
the “Brexit is Brexit” slogan that may still prove tantamount
to cutting one’s nose to spite one’s face.
Brexit strategy: When May became Prime Minister there was a
small window of opportunity to change the trajectory. She could have said
she was not bound by Cameron’s pledge to adhere to the results of the
referendum. May’s government has not been bound by other policies of the
previous Tory government. She could have said that the referendum was
non-binding and why pretend otherwise.
It won with the slightest of majorities, which was not to make such an
important decision as changing a treaty. With Labour having inflicted on
itself serious injury, she could have won an election if she lost a vote of
confidence. Instead, she went with
the “Brexit is Brexit” slogan that may still prove tantamount
to cutting one’s nose to spite one’s face.
A week ago, May
confirmed that she was willing to sacrifice access to the single market in
exchange for greater control over immigration and not being subject to the
European Court of Justice. Sterling fell in response through the $1.22 area that had served as a
base since October and fell to two-month lows against the euro. She is
expected to outline more of her approach in a speech on January 17. A new
wrinkle has emerged, and it may blunt or
neutralize the negativity of the hard exit that May appears to be leading the
UK. The Northern
Ireland government collapsed at the start of last week. If the UK Supreme Court
grants, it is expected to do shortly, a role for the parliament that sits in
Westminster, the Parliament in Northern
Ireland has joined the suit. Without a sitting parliament in Northern
Ireland, May’s intention on triggering Article 50 at the end of Q1 would likely
be frustrated.
2. ECB
meeting: After
having adjustment policy last month, there seems to be practically no chance
that the ECB introduces new initiatives. Draghi’s presentation may be
ho-hum. The eurozone economy has
evolved in line with the ECB’s expectations. Investors will be most
interested learning Draghi and the ECB’s take on the stronger than expected
rise in CPI. Recall headline CPI jumped to 1.1% in the preliminary
estimate in December from 0.6% in November. It is expected to be confirmed the
day before the ECB meets. Draghi can be expected to resist ideas such as those
suggested by German Finance Minister Schaeuble that it is time to reconsider
the thrust of monetary policy. If it were
up to officials like Schaeuble, the
policy would not have been implemented in
the first place.
meeting: After
having adjustment policy last month, there seems to be practically no chance
that the ECB introduces new initiatives. Draghi’s presentation may be
ho-hum. The eurozone economy has
evolved in line with the ECB’s expectations. Investors will be most
interested learning Draghi and the ECB’s take on the stronger than expected
rise in CPI. Recall headline CPI jumped to 1.1% in the preliminary
estimate in December from 0.6% in November. It is expected to be confirmed the
day before the ECB meets. Draghi can be expected to resist ideas such as those
suggested by German Finance Minister Schaeuble that it is time to reconsider
the thrust of monetary policy. If it were
up to officials like Schaeuble, the
policy would not have been implemented in
the first place.
The first
inkling that policy is indeed working is not the time to pullback, Draghi may say. In addition to
cautioning against jumping to conclusions based on one month’s data, he may note that the rise in headline measures is
primarily the result of energy prices. The core rate increased to 0.9% in
the preliminary estimate for December.
The cyclical low was 0.6%. Pressure is likely to mount until the
updated staff forecasts in March. Note that the base effect warns of
additional gains in CPI. Last January’s 1.4% decline (month-over-month)
will drop out of the year-over-year comparison. Despite the
increase in price pressures, inflation expectations remain deflated. The
German 10-year breakeven is a little below 1.3%.
inkling that policy is indeed working is not the time to pullback, Draghi may say. In addition to
cautioning against jumping to conclusions based on one month’s data, he may note that the rise in headline measures is
primarily the result of energy prices. The core rate increased to 0.9% in
the preliminary estimate for December.
The cyclical low was 0.6%. Pressure is likely to mount until the
updated staff forecasts in March. Note that the base effect warns of
additional gains in CPI. Last January’s 1.4% decline (month-over-month)
will drop out of the year-over-year comparison. Despite the
increase in price pressures, inflation expectations remain deflated. The
German 10-year breakeven is a little below 1.3%.
1:
Trump’s inauguration: Donald J Trump will become the 45th
President of the United States on January 20. There is great uncertainty
surrounding the policies his administration will pursue, and its priorities.
The only thing we can be confident of is there will be changes in both
style and substance. It has already become clear in the confirmation process
that many of new cabinet officials disagree with important elements Trump’s
campaign rhetoric, and disagree with each other. Presidents have their own decision-making style, and it is not clear where power will truly lie. Only
infrequently is an org chart particularly
helpful.
Amid the
uncertainty, there are a few important constants. First, the economic team is very pro-growth.
The usual reasons for not pursuing policies that lead to stronger growth, as the effect on the trade deficit, the dollar, or inflation are not
acceptable to many in the new economic team. Second, Trump does not feel
bound by American tradition, including resisting sphere of influence claims
(including formally recognizing Russia’s annexation of Crimea), opposing
nuclear proliferation, defender of free-trade, and the acceptance that Taiwan
is part of China (even while opposing a military solution). Third, the communication style, including the extensive
use of Twitter and citing names of
specific companies and people, create new uncertainties for investors. In
situations like that, people often find ways to look like they are complying in
hopes of deflecting negative attention
while pursuing their own agenda.
Fourth, the style and policy substance is likely to lend itself to a
heavy volume of misunderstanding, clarifications, and in one word,
controversies, that make it all the more important that investors distinguish
between noise and signal and focus on the latter.
uncertainty, there are a few important constants. First, the economic team is very pro-growth.
The usual reasons for not pursuing policies that lead to stronger growth, as the effect on the trade deficit, the dollar, or inflation are not
acceptable to many in the new economic team. Second, Trump does not feel
bound by American tradition, including resisting sphere of influence claims
(including formally recognizing Russia’s annexation of Crimea), opposing
nuclear proliferation, defender of free-trade, and the acceptance that Taiwan
is part of China (even while opposing a military solution). Third, the communication style, including the extensive
use of Twitter and citing names of
specific companies and people, create new uncertainties for investors. In
situations like that, people often find ways to look like they are complying in
hopes of deflecting negative attention
while pursuing their own agenda.
Fourth, the style and policy substance is likely to lend itself to a
heavy volume of misunderstanding, clarifications, and in one word,
controversies, that make it all the more important that investors distinguish
between noise and signal and focus on the latter.