With the Fed continuing to operate ‘under a cloud of uncertainty’ the most recent FOMC minutes from the December meeting state that the committee is find it ‘challenging to communicate to the public the likely path of the federal funds rate’. Although the Fed officials expect upside risks to US growth, resulting from potential fiscal deployment, ‘participants emphasized their considerable uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply’. Many Fed members also believe the central bank may need to raise rates faster than previously expected as inflation could start filtering through the economy and the risk of unemployment undershooting its longer-run normal level has ‘increased somewhat’. With three 25bp Fed hikes pencilled in for 2017, all the uncertainty surrounding the Trump administration and thus the economy may see the Fed act on a wait-and-see basis, and the central bank could continue to overpromise and underdeliver as it looks to normalise rates.
Off the back of the minutes there was very little change in terms of US Treasury movement, but the dollar has backed-off recent all-time highs as the ‘Trump rally’ appears to be nearing its end. Meanwhile the offshore renminbi has taken the market by surprise, rallying to near-two-month highs against the dollar; as China’s macro data remains stable-to-positive, coupled with this week’s encouraging steps to choke off previously untargeted capital outflows.
China’s growth figures surprised a lot of sceptics last year, and we have seen further solid momentum into the beginning of this year. This week the official and Caixin PMI readings for December indicate further expansion within both the services and manufacturing sectors; with the Caixin non-manufacturing sector expanding to the strongest level in 17 months. If Trump’s campaign promises to bolster infrastructure spending do come to fruition, this will no doubt boost China’s exports, albeit with the unknown caveat of punitive import taxes.
With China’s economy rapidly reforming, to a stage where domestic consumption remains robust and trade is no longer the largest contributor to GDP growth, sentiment in China appears to be improving; despite Trump’s US protectionism promises. According to those in the know, over 60% of Chinese exports are with markets outside of the US, Japan and eurozone. So, if Trump does manage to go through with his 45% tariffs on Chinese exports, and cuts imports from China by 50%, the impact on the country’s diversified trading revenue stream will most likely be nudged at most. This week Bloomberg economist scaled up their Q1’17 China growth estimates to 6.6%, from 6.5% off the back of sustained stimulus and sturdy global demand.