Yellen’s Path Cleared by Trump’s Moderation

After accusing Japan
of manipulating its currency, Trump reportedly did not broach the topic with
Prime Minister Abe in their meeting before the weekend. 
The Administration also eased some
concerns by underscoring its commitment to NATO, despite Trump’s claim it was
obsolete.   Contrary
to earlier reports, the US apparently has agreed to continue sanctions against
Russia associated with the aggression in Ukraine.  After seemingly encouraging a
more aggressive Israel, President Trump warned that its construction efforts on
the West Bank were not helpful for peace. 

In the other
countries that report, inflation pressures are set to increase. 
In the UK, the year-over-year rate is
likely to rise from 1.6% in December to 1.9%-2.0% in January.  This is
still primarily the impact of the rise in energy prices, but the past
depreciation of sterling will likely drive it going forward.  In Switzerland, deflationary pressures are
subsiding.  CPI is likely to rise to 0.3%
from the flat reading in December.  

inflation is also rising, and the stabilization of the economy may allow
officials to turn their attention toward curbing credit growth. 
Still, the expected January increase to
around 2.6% from 2.1% may overstate the case if prices rose ahead of the Lunar
New Year.   Yet, producer prices continue to accelerate.  The year-over-year pace bottomed in last 2015 at -6.0%.  It moved above zero last September.  Producer prices are expected to have accelerated to a 6.6% pace in January from 5.5% last December.  

The US and UK also
report January retail sales.
may move in opposite directions.  In the
US, December retail sales rose a strong 0.6% and likely slowed to around
0.2%.  Auto sales remained elevated but slowed sequentially, and this may be offset by an increase in gasoline
prices.  UK retail sales fell a sharp 1.9% in December and are expected to bounce back in January.  The median forecast in the Bloomberg survey was for a 1.0% gain.

The UK and Australia report their latest employment
 The British labor market has been fairly steady.  The three, six, and 12-month averages have converged just above zero.  In percentage terms it has been between 2.1% and 2.3% for  nearly two years.  In January,  the claimant count is expected to have edged slightly higher.  However, some signs of deterioration have emerged. 

Employment growth, which is reported with an extra month lag, like earnings,  has slowed, and on three-month comparative basis has been negative in October and November, but is expected to have snapped back in December.  Average weekly earnings growth is expected to have remained unchanged in December at 2.3% and 2.1% when bonuses are excluded.  In December 2015, average earnings on the three-month year-over-year measure rose 1.9%.  

Australia experienced unusually strong job growth in Q4 16.  The monthly average was 22.4k, which follows a loss of nearly five thousand jobs a month in Q3 16.  Full-time jobs growth was even more impressive, rising 31k a month on average in Q4, the strongest three-month average since Q3 2010.   This is not sustainable.  Thus there would seem to be downside risks to the median forecast for a 10k increase in jobs in January.  The unemployment rate may be driven by the participation rate, which is expected to have remained at 64.7%.  Last October’s 64.4% participation rate may have been the low point.  

Sweden’s Riksbank meets on February 15.  It is not expected to change policy.  However,  it is in a bit a quandary.  The ostensibly reason for its aggressive unorthodox monetary policy was to arrest deflation, and that meant in part to curb the strength of the krona.    Inflation has moved toward 2%, but the krona appreciated about 5.25% on a trade-weighted basis since early November.  It has recouped 61.8% of the previous six-month (~7.6%) decline.  Industrial output and consumption finished 2016 on a soft note, but the January PMIs’ suggest it was a temporary lull.  

The euro’s 6.75% decline against the krona is the driver.  The central bank may find some consolation that the euro finished last week with two successive closes above its 20-day moving average for the first time since the first half of last November when the cross was SEK9.85 rather than SEK9.49 now (having been down to SEK9.41).   Given the political calendar for the eurozone, the krona may not receive the same selling pressure as the euro.  

Sweden reports the January CPI figures two days after the Riksbank meeting.  The optics of a 0.7% monthly decline, which the median expects, may be worse than the reality.  Headline CPI has fallen in January for at least the past decade.  Due to the base effect, the year-over-year rate  would ease, if the median is correct, to 1.5% from 1.7% in December.  That was the highest reading in a little more than five years.  What Sweden calls the underlying rate, which uses fixed rate mortgages to calculate CPI is expected to slip to 1.7% from 1.9%.  


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