The IMF upgraded its outlook for the US economy, albeit with high uncertainty regarding the policy stance of the Trump administration
The main message from US President Trump’s inauguration speech was “putting America first”, providing little detail on tax reforms, infrastructure spending, trade policy and deregulation.
High uncertainty regarding the prospective policies and their impact on the economy will continue during Q1:17. Note that the IMF raised its forecast for US GDP growth by 0.1 pp to 2.3% in 2017 (compared with the projections of October 2016) and by 0.4 pps to 2.5% in 2018.
The IMF also raised the forecast for China’s GDP growth in 2017 by 0.3 pps to 6.5%, due to ongoing stronger activity and the expectation for more policy support. China’s outlook is challenged by FX capital outflows, excessive leverage (private debt of 210% of GDP) and potential asset bubbles (housing market).
Regarding the property market, the Chinese authorities signaled that the measures aimed at cooling down house price growth in the cities that have witnessed the largest increase will continue via, inter alia, increasing land supply and encouraging the implementation of property taxes.
The ECB, as expected, maintained unchanged its policy stance on Thursday. Mr Draghi set a dovish tone dismissing the recent (energy-driven) rise in headline CPI, and highlighted that the ECB sees no convincing upward trend in underlying inflation.
Mr. Draghi reiterated that a substantial degree of monetary accommodation is needed for a sustained adjustment in the inflation path towards its target (i.e., below but close to 2%), adding that such a convergence must be self-sustained, i.e., able to remain at such levels without monetary policy support.
Investors took some profits during the past week, ahead of the inauguration of President Trump and despite strong US earnings announcements (see Table on page 3). The MSCI World declined by -0.4% wow (+20.4% yoy), with the FTSE 100 underperforming (-1.9% wow / +26.9% yoy in GBP terms) in the aftermath of PM May’s speech.
10-Year US Treasury yields rose 7 bps wow to 2.47% following strong CPI data and Fed Chair Yellen’s hawkish comments (warning for a potential “nasty surprise” on inflation). With inflation broadly in line with the Fed’s projections, there is an increased likelihood for 3 rate hikes in 2017 (in line with FOMC guidance). US Treasuries currently are among the most heavily crowded short trades.
The improved prospects for euro area growth and higher inflation from movements in crude oil prices continued to push up 10-Year German yields by +8 bps to a 1-year high of 0.42%. Year-to-date, Bunds are up by 21 bps (Total Return: -1.4%)
On Monday, however, there was a weak market reaction to Mr Trump’s inauguration speech (S&P500: -0.3%, EuroStoxx: -0.7%), with the trade stance of the new administration a concern (e.g. signaling the start of NAFTA renegotiation and withdrawal of TPP). US Government bond yields declined by 7 bps to 2.4% and the broad trade-weighted USD (-0.6%) lost further ground, now -1.6% lower than its peak in December 2016.