Yellen nor Kuroda nor Carney will Take the Spotlight from Trump

<br /> Yellen nor Kuroda nor Carney will Take the Spotlight from Trump – Marc to Market<br />


Three major central banks meet in the week
ahead, and there are several important reports due out that will give investors
more insight into how the economies have begun the new year. 
However, the uncertainty surrounding these events and data
pale in comparison to known and unknown impulses from the new US Administration.  
On one hand,
there is little thus far that should be surprising.  
The executive orders, like freezing new regulations, are what other
presidents have done, including Obama, or ideas that Trump supported during the
campaign, like withdrawing from TPP, supporting pipelines, the wall on the
Mexican border, not funding international activity the support abortions, and
limiting immigration by Muslims.  
On the other hand, it is not so straight forward.  There are no indications that the
rhetoric about prosecuting Clinton over her emails is going forward, and in
fact, press reports suggest that officials in the new Administration may also
be continuing to use private networks and
unsecured communication.   China has not been cited as a currency
manipulator, as Trump had pledged as a Day 1 priority.  The freezing of
immigrants from several Muslim countries is what Trump supported, but that
Saudi Arabia was not on the list, (nor Egypt, Turkey,
and Azerbaijan). Despite the role of
Saudi nationals in the 9/11 attack, raises questions even from those who
support the initiative.   
That the freeze includes people with green cards and those in transit,
struck many as particularly severe, and a judge sought to limit the impact on some new arrivals.
Many airports were scenes of large spontaneous protests.  The situation was still playing out Sunday morning.  A
 study by the libertarian Cato Institute found that between 1975 and 2015, immigrants from the seven countries from where immigrants are
frozen, have not committed fatal terrorist attacks on US soil. Also, Muslim
Americans with family backgrounds in those seven countries have killed no
Americans in the past 15 years.  
When Trump
signed the order to officially end the TPP
negotiations, he noted that Clinton also opposed the deal, though during
the campaign he accused her of being duplicitous and really supporting the final agreement.  
Trump also express interest going forward
in bilateral agreements rather than multilateral arrangements.  Couldn’t
TPP form the basis of a bilateral US-Japan free-trade agreement?  
Investors are
also continuing to wrestle with the conflicting views represented by different
Administration officials.
 The President seemed to endorse actions that
are defined as torture, but then said he
would defer to Defense Secretary General Mattis, who is opposed.  What
does it mean to say that NATO is obsolete but important?  Some members of
the cabinet are more pro-trade than others, and it is not clear who will be the
The rubber
meets the road in the middle of March. 
  The debt ceiling is expected to be reached.  This is the authorization to pay for what has already largely been spent.  It is the bill that comes
after the meal.  The debt ceiling has been lifted nearly 75 times since
the early 1960s.  It is part of the US political ritual where Congress
uses the debt ceiling as leverage to try to get concessions from the President.
The point man
for the White House is the Office of Management and Budget (OMB) Director,
Mulaney, who is a deficit hawk.
  He has gone beyond Trump did in the
campaign and suggested that cutting
Social Security and Medicare may be
necessary.  Other campaign promises
and other cabinet members are committed to various fiscal actions, including
tax cuts and infrastructure, that will likely boost the US deficit (and
therefore debt), even if reasonable people differ on the magnitude and duration
of the impact.
The Mexican
peso was the strongest currency in the world last week, despite the escalation
of tensions.  
Mexican peso bottomed on January 11 and retested the low on January 19.  
It rose 3.3% last week and closed well.  Since it trended higher
consistently last week, it is difficult to know if the news that the two Presidents talked after a scheduled meeting was canceled when Mexico refused to pay for the
wall that Trump insists upon the building.
Some suggest
that the peso’s recovery was the realization that things could not get worse,
though given when the peso bottomed, things have gotten worse, with a
suggestion that among things the US could do to get Mexico to pay for the wall
was a 20% tariff on Mexico’s exports to the US.  
While this seems far-fetched, as we have
noted, the US President can impose a 15% temporary tariff under conditions of a
balance payments emergency. 
Given the
complicated continental trade where a part could cross the border several
times, the law of unintended consequences risks significant economic
dislocations in the US. 
 Other suggest it is the Negotiator
in Chief posturing.   Consider this: before last week’s peso’s gain, since
the beginning of 2016, the peso had depreciated by more than a fifth, partly
driven seemingly by Trump’s comments, which
if sustained would seem to offset some of the sting
of a tariff.  
This is Trump’s
first tangle and one that he prioritized.
It is important
that he wins it from a political point of view. The wall is of
great symbolic value.  It is a campaign promise that many of his
supporters appear to have taken literally.  
The Federal
Reserve, the Bank of England and the Bank of Japan hold policy meetings in the
week ahead.
  None of the central banks are likely to take fresh action.
 Each may be somewhat more upbeat than previous statements. 
The US economy
moderated more than expected in Q4 16 after a 3.5% annualized clip in Q3 16.
However, the best
measure for underlying economic signal excludes inventories and net exports.
This measure of final domestic sales accelerated to 2.5% from 2.1%.   The
Fed’s statement will also likely recognize that increased inflation
expectations.  The five-year breakeven is above 2%  for the first
time in a couple of years, and the three-year breakeven looks set to cross that
threshold in the days ahead.  The uncertainty surrounding the fiscal
initiatives of the new US Administration has not been lifted.  It seems unreasonable to expect anything about
the balance sheet to be including in the statement.  This may be addressed at the mid-March meeting
(around the time of the debt ceiling), if not directly than at the press
After rallying
into the last FOMC meeting, the dollar has pulled back in recent weeks.
  The euro’s five-week and roughly
4.4% was snapped last week with a 0.05% loss.  Since the last FOMC
meeting, the only one of the major trading partners that the dollar has
appreciated against is the peso (2.65%).  It has fallen against the euro
(2.8%), Canadian dollar (1.4%),  and Chinese yuan (1.0%). The Federal
Reserve is unlikely to feel compelled to discuss the dollar.  
The Bank of
Japan meets. 
 The rise in global interest rates is
pulling up Japanese rates, requiring the central bank to defend its +/- 10
bp target range.  The BOJ may upgrade its economic assessment after
stronger than expected exports and industrial output.  It may be too early
to expect the BOJ to upgrade its inflation outlook, but even many private sector
economists suspect the worst of deflation is passed.
The Bank of
England meets.
  Although some talk about the central
bank’s neutral stance, it is still engaged in buying Gilts and corporate bonds.
It has been fairly successful in purchasing corporate bonds and may achieve its
objective earlier than had been anticipated.  There could be some update
of operational issues.
 It is
true that the risk of a rate cut has
slackened considerably since last summer, and that the next move is likely to
be an increase.  
decision to keep rates on hold will likely have unanimous support.  The
risk is that the BOE turns more upbeat at exactly the wrong time.  The
official forecasts for this year and next are above the median forecast (1.4%
 vs. 1.2% and 1.5% vs. 1.3% for official vs.
median for 2017 and 2018 respectively).  
US:  While the potential to impact the market
is strong, the January report has little policy implication.  What the Fed
decides to do in March will have practically nothing to do with the number of
jobs or wage growth in January.  It will not change the general perception
that while job growth is slowing as full employment is reached, it is sufficiently strong to continue to absorb some
slack.  The US economy created an average of 180k jobs a month last year
after 229k a month in 2015. In Q4 16 average job growth slowed to 165k.
 The median forecast is for around 175k increase.  
Average hourly
wages will be watched especially closely following the increase in minimum wage
in many states and cities at the start of the year.  A 0.3% increase after
0.4% in December would be solid.
 The three, six, and 12-month
average is 0.2%.  However, because of
the base effect (0.5% increase last January, the year-over-year rate will
likely ease from 2.9%.  The year-over-year comparison is more likely to
improve this month.  Last February earnings were flat. 
Separately, note
that auto sales are expected to slow from a cyclical high 18.39 mln annual pace
in December.  A 17.5 mln unit pace in January would still be solid and a
little above last year’s monthly average even if sequentially it is softer.
Eurozone:  Headline eurozone
inflation is rising.  It rose 1.1% year-over-year in December after a 0.6%
pace in November. The first estimate for January is expected to be 1.4%-15%.
The ECB target is near but below 2%, but Draghi has been emphasizing the core
rate which is expected to remain unchanged at a subdued 0.9% pace.  It
bottomed at 0.6%.   He is opposed to reconsidering the decision made last
month to extend the asset purchases through the end of this year but at a 60
bln euro a month pace rather than the current 80 bln that run through March based on the recovery in oil
We have made the
point before, and it is worth making again:  In lieu of offsetting stimulus policies by Germany, or the
structural reforms that Draghi repeatedly demands, Germany inflation running a
bit above the periphery is helpful in boosting the competitiveness of the
periphery.  That said, ideas that an Italian election could be held in June, now that the Court ruling
leaves both chambers with a proportional representation system, suggests
Italian bonds will continue to underperform.  
We suspect that
the economies and prices will evolve to allow the ECB to consider tapering
further in late-Q3 or early Q4.  The eurozone
also reports its first estimate of Q4 GDP.  The data suggests growth of
0.4%-0.5% growth, which would keep the four quarter pace steady in the
1.8%-1.9% range that has been sustained
since the middle of 2015.  Growth is not spectacular,
but it is solid and above what economists estimate to be the trend pace.
 The PMIs suggest the momentum has been
sustained into early 2017. Unemployment is stubbornly easing in Greece, Italy, and Spain, but in the aggregate the unemployment area in EMU is
expected to have remained at 9.8% in December for the third consecutive month.
China: Although the Lunar New Year holiday runs through the week,
China will report the manufacturing and the non-manufacturing PMI, and Caixin
will report its manufacturing PMI.  The manufacturing surveys are expected
to soften slightly (0.1-0.2 points) with little significance.  Both are
expanding between 51-52.  The non-manufacturing PMI rose 54.5 in December,
which was the second best reading (after November 54.7) in a couple of years.  Officials
in Beijing are likely watching the new US Administration closely, perhaps
through the prism of the Chinese saying about killing a chicken to scare the
The onshore yuan
has appreciated by almost 1.0% this month,
and the onshore yuan has risen by 1.5%.  Since the squeeze that appears to
have been engineered by the PBOC at the start of January, the offshore yuan is
trading at a premium to the onshore yuan, suggesting speculative pull has been
neutralized, at least for the time being. The evolution of the relationship in
a stronger US dollar environment may be an important test.  


Yellen nor Kuroda nor Carney will Take the Spotlight from Trump
Yellen nor Kuroda nor Carney will Take the Spotlight from Trump

Reviewed by Marc Chandler

January 29, 2017

Rating: 5

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