The Stratton Street Team would like to wish all our readers a very happy and prosperous 2018.
An interesting couple of weeks has followed our last weekly report, we’ve had: Jong-Un and Trump gloat about the location and size of their nuclear buttons, clashes in Iran, broadly stronger PMI and ISM numbers, signs of a pick-up in global growth, a record breaking US equity market, US yield curve flattening, renminbi appreciation, and of course the US tax “legislative victory”; amongst other events.
Last week we heard from the FOMC following the committee’s meeting in December (where the central bank hiked rates by 25bps to 1.25%-1.50%). There appeared to be mixed feelings about inflation, with recent readings showing a pick-up in prices of goods and services, some members argued that inflation may remain below the central bank target for some time. Meanwhile, others warned of the possibilities that increased output resulting from recent “fiscal stimulus or accommodative financial market conditions” could, in fact, cause inflation to spike. On the recently passed tax bill, a number of participants judged that business taxes “would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain”. There was also a mention, that although the labour market remains strong, “wage increases has generally been modest”; on Friday average hourly earnings for December were in-line with expectations at 2.5% yoy. Overall, most participants maintained their view for “continuing a gradual approach to raising the target range” (three rate hikes for 2018 are currently priced in, with the next hike expected in March).
Broadly stronger US data, including a stronger-than-expected ISM manufacturing reading saw a bounce in the dollar, which eventually lost its footing following the FOMC’s “gradual” comment, and weaker-than-expected non-farm payroll and ISM composite prints. Meanwhile, the yield on the 10-year US Treasury sold-off 7bps, closing the week at 2.477%. This week we’ll get the JOLTS job openings report on Tuesday. Import and export price indexes follow on Wednesday, where the month-on-month readings are expected to have dropped in December, from previous levels. Thursday will see December’s PPI releases, and December’s monthly budget statement, and the week ends with CPI prints (headline number expected at 2.1% in December) and retail sales readings (expected to have weakened in December from previous levels).
Elsewhere, the renminbi maintained its stronger trend against the dollar, gaining 0.55% over the week. With the renminbi breaking through the 6.50 level last week it is clear that policymakers are unfazed by its appreciation, and a stronger renminbi could help stem capital outflow. Meanwhile, Caixin PMI readings for China surprised to the upside in December. During China’s Central Economic Work Conference - where policy and forecasts were set for 2018 - there was an emphasis placed on “high quality growth”, at the expense of faster pace of expansion; it was very apparent that policymakers would tolerate slower growth going forward. Although no growth target was mentioned at the conference, according to sources, at a closed-door meeting during the event top leaders agreed to keep the target at “around 6.5 percent”. The pick-up in global growth will no doubt support China's economic expansion. In terms of data, this week we’ll see China’s PPI and CPI prints and trade numbers for December.
Also this week, the two Koreas are expected to hold talks for the first time since 2015 tomorrow. Ahead of that PM Theresa May will begin the process of reshuffling her cabinet. We will also see the ongoing coalition discussions in Germany, and France's Macron visit to China could garner some interest. On Wednesday, South Korean President Jae-In will host a New Year conference where the likes of North Korea, and relationships with China and the US are expected to be discussed. 2017 growth estimates for Germany could be of interest on Thursday, as could the ECB’s December meeting notes release. Also on Thursday, China is due to commence its three-day annual plenary meeting, where it will set the agenda for its anti-corruption campaign for the year. Mr. Trump's first medical examination by a government doctor will take place on Friday; the subsequent official statement on the president’s health could be of interest to some. We will also hear from a number of Fed members later today; discussing Inflation targeting, with others speaking about Monetary Policy and the US Economic Outlook.