Originally published by Rivkin Securities
Looking ahead this week there is a plethora of key data being released around the globe including central bank decisions in Japan, the US and England. All three central banks are expected to keep monetary policy unchanged as they wait and see for progress towards stimulatory policies in the US and the potential flow on effects. Tonight we will also have German and US inflation numbers while the Bank of England will also publish their quarterly inflation report on Thursday with updated forecasts for the economic outlook. To finish the week the market will tune in for US non-farm payrolls on Friday with around 175,000 jobs forecast to be added (MoM Jan).
Realistically any reading above 100,000 is enough to satisfy the Fed as they gradually raise interest rates. While their own projections signal the Fed expects to raise borrowing costs three times in 2017 the market is maintaining a healthy scepticism. The probability calculated from Fed Fund futures implying two hikes are more likely than three with the first expected for the June 13-14 meeting.
Aside from assessing data this week the market will continue to monitor the political situation in the U.S. as the clock ticks on Donald Trump’s ability to follow through on campaign promises relating to fiscal stimulus, reducing regulation and lowering tax rates. A significant portion of this has been priced into equity markets since November 8th and markets continue to look vulnerable to a correction should this fail to materialise. This is perhaps best highlighted by the extremely low VIX reading on the first chart below along with the S&P 500, such low readings signal a significant degree of complacency in the market which becomes more exposed to changes in sentiment.
Last week Trump made good on promises towards immigration and withdrawing from trade deals, the concern for the market is if he continues to prioritise achieving these policies over his economic policies, which he still needs to provide clarification on. The market’s patience will begin to wear thin the longer this takes and that is the key threat to new all-time highs.
On Friday US equities were mixed with the S&P500 -0.09% weaker and the Nasdaq 100 up +0.22% following fourth quarter GDP which came in modestly below expectations. Expanding at +1.9% with forecasts calling for +2.2% taking growth for all of 2016 to +1.6%. Despite the disappointing figures there were encouraging signs with an uptick in business investment after four quarters of declines. Looking ahead it’s all about Trump and his ability to make good on economic policies, which if implemented could see a surge in growth as early as the second half of 2017, although 4% seems to be a stretch.
Locally the S&P/ASX 200 finished +42.48 points higher on Friday at 5,713.99 although we can expect a softer start to trading this morning with ASX SPI200 futures finishing -11 points lower on Friday.
Data releases:
· German CPI (MoM & YoY Jan) 12:00am AEDT
· US Personal Income, Spending and Expenditure (MoM & YoY Dec) 12:30am AEDT
Chart 1 – VIX (Blue) & S&P500 (Purple)
