The Global Markets Weekly – 12/15/17

Posted December 17, 2017 by rvillareal

Recapping a Busy Central Bank Week, U.S. Tax Bill Ahead

A busy back half to last week left us with central bankers eying a firmer growth outlook before year end, all satisfying market expectations. The Fed made some tweaks that suggest investors shouldn’t discount it meeting its median “appropriate path” dot of three hikes in 2018, and if wrong more likely adding a fourth, not backsliding into two. We and they will be waiting for the mix of final details and progress on the U.S. tax bill this coming week, which may include final scores and a vote before Christmas. Bright spots on the corporate side are paired with adjustments on the individual side that favor certain constituents over others. Unintended (and intended) consequences are a feature of quickly-passed legislation, and cleanup is hard with narrow margins.

Thursday’s ECB’s meeting repeated a similar litany of reasons why standing pat was the central bank’s default policy option. Despite expressing confidence in the strengthening economic expansion, Draghi emphasized why a stubbornly low inflation rate required maintaining ultra-accommodative policies through September 2018 and beyond if warranted. Strong pressure by the Bundesbank notwithstanding, there were no hints that the central bank will move away from negative short-term interest rates prior to the ending of QE. Still, given the strengthening expansion and signs that inflation is creeping up, Decision Economics (DE) has raised the odds of a rate hike to 30% by the fall of 2018.

Finally, the Bank of England remains between a rock and a hard place, sticking to an even-keel policy despite another jump in inflation to 3.1% in November. The aftereffects of the pound’s depreciation continue to work through the economy. Confronting this type of cost-push inflation by tightening monetary policy raises the odds of pushing the already weakened economy into recession.  Absent significant progress in Brexit talks and given PM May’s fragile political standing, BoE policy is likely to remain on hold.  A breakthrough, however, following summit meetings in Brussels on December 14-15, suggesting that the road is clear for Brexit negotiations to proceed could be interpreted as a sign that a “soft” Brexit might still be possible.  Such development would be pound-positive.  In that case, the BoE is likely to continue with its hawkish chatter, but without meaningful actions, thereby providing support to the currency.

More detail can be found within the full Global Markets Weekly

Coming Week’s Key Indicators and Events:

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