Central banks to remain on hold with politics at the forefront
The dollar is weaker after the Trump administration remained more focused on anti-trade policies than the fiscal stimulus and infrastructure spending that lifted inflation expectations in the U.S. The first 100 days of Trump’ administration will be crucial. While he seemed bulletproof during the campaign his administration has stumbled over itself on an overall strong start, but lacking some strategy or political savvy. He has yet to bring markets onside with any tangible policy on fiscal stimulus or infrastructure spending. There is an expectation of higher inflation, which in turn has made the Fed up their rate hike forecasts to 3/4 this year. The Fed had the luxury of patience on monetary policy tightening in the past due to the stagnant inflation, but a government willing to spend to boost growth could force a faster pace of interest rate rises.
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The economic calendar for January 30 to February 2 is packed to the brim with important releases. Four central bank rate decisions: Bank of Japan (BOJ), U.S. Federal Reserve, Bank of England (BoE) and Reserve Bank of Australia (RBA). Manufacturing data from the United Kingdom, United States and China. Employment data out of the U.S. with the publication of the ADP private payrolls and the biggest indicator in the currency markets the U.S. non farm payrolls (NFP) to finish the week. Traders will have to keep a close eye on their calendars this week as a deluge of data will be hitting the wires.
The Fed has received the backing of U.S. Treasury Secretary nominee Steven Mnuchin regarding the independence of the central bank. The Federal Open Market Committee (FOMC) on Wednesday is not anticipated to bring any surprises after the December rate hike the central bank is expected to wait-and-see to gauge the impact of the first 100 days of the Trump administration and adjust the interest rate if needed. A rate hike is not forecasted in the first quarter of the year and the Fed is willing to let the economy run a little hot before stepping in. The lack of details from Trump policies on policies who could bump inflation higher have kept the probabilities of no changes in the interest rate at 96 percent in February according to the CME’ FedWatch tool that tracks Fed Fund futures prices.
US Growth was slowed down by imports, which brings trade to the forefront, but the rise in imports was fuelled by a strong dollar not a lack of tariffs. Currencies that have depreciated against the dollar enjoy a competitive advantage. Trump administration is creating a paradox by focusing on growth which will boost the USD versus wanting more exports that are hurt with a strong USD. There are few good outcomes of the trade spat with Mexico with the focus on the proposed wall between the two nations and who will pay for it. A questionable matter of national security has hijacked the conversation away from the promised policies on growth initiatives.
American jobs are forecasted to have another 150,000 plus reading on Friday, February 3 with the release of the U.S. non farm payrolls (NFP) by the Bureau of Labor Statistics. The emphasis on market watchers will be on wages more than the headline jobs number. The positive wage growth in the December data was the highlight even if the headline number missed expectations. Worker’ take home pay is expected to grow 0.3 percent in the last month.
The Bank of England (BoE) is expected to hold rates unchanged on the first Super Thursday of the year. Super because of the release of the inflation report, interest rate decision, minutes from the monetary policy committee and a speech by BoE governor Mark Carney. The threat of Brexit has loomed over the central bank, but with an unclear timeline all that is left for policymakers is to wait.
Source: Market Pulse
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