The Weekly Update

In its first international report since Donald Trump’s unexpected presidential victory, the Organisation for Economic Cooperation and Development (OECD) said that although the exact benefits of Trump’s proposed spending and tax cuts are unclear, it does expect his proposals to boost economic growth in the US. The OECD said the likely boost would improve US growth in 2017 from 1.9% to 2.3% and in 2018 from 2.2% to 3%. As for global economic growth, they have raised the outlook from 3.2% in 2017 to 3.3% and from 3.3% to 3.6% in 2018. The forecasts are based on the US government increasing spending in 2017 and 2018 by .25% of GDP, together with a cut in the corporate tax rate along with a cut in income tax. Together the 2 cuts in tax will represent approximately 1.25% of US GDP by 2018.

OPEC agreed to their first production cut in eight years with members on paper at least agreeing to a cut of 1.2million barrels a day. Headlines such as ‘OPEC resurrection’ ‘OPEC are back’ and ‘OPEC in the driving seat’ combined with a near 10% bounce in the price of Brent, welcome the news that OPEC and Russia are working together and Saudi and Iran are in agreement. However, the agreement depends on self-compliance of all the countries involved to keep to targets and there remains problems as to how to measure production and so this agreement will be extremely difficult to police. Countries such as cash starved Venezuela and Angola would love to take advantage of higher pricing and sceptical traders doubt if Iraq and Iran will be in compliance in just a couple of months’ time.  Also the promised reductions by non-OPEC members Russia and Mexico of 500,000 barrels a day is a huge proportion of the reduction and in the case of Mexico the cut looks more like a natural decline rather than genuine production compliance.

Towards the end of the week the attention was taken up by Italy's constitution referendum and the Austrians voting for a new Prime Minister over the weekend. Italian Prime Minister Matteo Renzi’s job was on the line if he was to lose. He had already said he'd resign if the nation rejects his political reforms, which polls and bond yields predicted would happen. In Austria the EU was hoping for an  independent pro-EU Alexander Van der Bellen being able to hold off the challenge of Norbert Hofer of the anti-immigration Freedom Party.

There was press speculation that the ECB could temporarily step up purchases of BTP’s (Italian Government Bonds) should Sunday’s result cause yields to spike. The suggestion in the Reuters report was that the ECB QE programme was flexible enough to allow for a temporary increase in purchases and that undertaking such a move would not necessarily need to be ‘rubber-stamped’ by the Governing Council, which as a reminder meets formally 4 days after.

Friday’s November non-farm payroll release showed 178,000 jobs added which was in line with expectations. The prior month’s reading of 161,000 jobs added was revised down to 142,000.  The unemployment rate fell to a nine year low of 4.6% from October’s reading of 4.9% and the participation rate dropped a little to 62.7%.  Average hourly earnings was an off setting factor to an otherwise expected and rather neutral report as month on month the -0.1% saw a 2.5% year on year number from the 2.8% previous report. This data release in conjunction with recent Fed commentary makes a December rate rise almost inevitable with the market pricing in a 100 percent expectation of an increase in rates. What is more challenging to determine is what a Trump Presidency really means for growth and inflation.