Normalization is finally coming
By Peter Rosenstreich
We expect the unexpected: a convergence of global normalization. Market optimism is supported by benign policy-tightening. Price-earnings ratios have moved past realistic, suggesting speculation at play. Policy missteps – probably driven by an inflation spike – could pop the bubble. Central banks are taking a gradual approach to nominalization, which means they might overlook short term risk. Market gyrating events such as North Korea and the Middle East are unlikely to derail this “goldilocks” environment.
Long US shutdown unlikely
By Vincent-Frédéric Mivelaz
A shutdown like the 16-day one during Obamacare negotiations (that cost USD 24 billion, according to Standard & Poor’s) or the 27-day shutdown of 1995 seems unlikely. We believe the US Congress will find a solution sooner.
Still, the week promises to be stormy on Capitol Hill. One conflict is over cancellation of the DACA program that protected young migrants, called “Dreamers”, against deportation. Also, 700,000 government employees won’t be working until the funding bill is finally signed! Services as vital will keep on the job: air traffic control, military, national security and law enforcement agencies.
Bank of Japan under pressure to normalise
By Peter Rosenstreich
The Bank of Japan will keep its policy unchanged for now. Positive price momentum gives the BoJ coverage to keep policy unchanged, despite speculation of premature normalization. However, the BoJ is clearly running out of time, and the market know this. While we can argue the data, the reality is that sustaining easing policy indefinitely is not an option.
In its Outlook for Economy and Pricing, both inflation and growth forecasts are expected to be revised higher. Global economic recovery will support Japan’s GDP growth. Consumer inflation should gradually improve (on Friday, Japan reported a core CPI increase to 0.5% from 0.2% in November), yet it remains below the 2% target. Meanwhile, the effectiveness of policy action and communication in weakening the Yen is decelerating. A rapid rise in US yields has uncharacteristically failed to boost USD/JPY appreciation. Moreover, lingering geopolitical risk (highlighted by US government shutdown) and potential disappointment in China growth could trigger JPY appreciation.
Correction in the EUR/USD is likely
By Peter Rosenstreich
A midterm-spread in US-Bunds and US-Europe yields suggests a correction in EUR/USD is likely. This, after the minutes of the last European Central Bank monetary policy meeting triggered an extension of EUR/USD rally to current 1.22 highs. They suggest that the ECB plans to address quantitative easing earlier than was expected. March is too early for the ECB to remove QE bias, as recent inflation data has been subdued. But heading into Italian elections on 4 March, the ECB must keep a reign on interest rates. This also suggests that ECB President Mario Draghi will sanitize any hawkish tone, even if Europe’s growth and inflation are above the ECB’s own forecast.
In Italy, deep austerity has created a solid populist base likely to make itself known in March. Still, the measures have failed to lower debt to GDP (now over 130%, 2nd highest in Europe) or generate strong economic growth. A hawkish ECB could trigger hikes in Italian rates, worsening current economic difficulties.
China booms ahead
By Peter Rosenstreich
We remain optimistic on China, with an above-consensus GDP forecast. This is based on global economics and China’s ability to harvest demand. Domestically, China is unbalanced but on a global basis it is diversified (its New Silk Road strategy is on mark). And in 2018, trade matters more than local consumption. On one hand, strong growth will help support weaker property prices that peaked in 2016, but should trigger action by policy makers to accelerate deleveraging and lower fiscal spending. Lower capital outflows and renewed positive investor confidence has lowered CNY deprecation risks.