After a rout in the US dollar focus shifts to whether inflationary pressures are building enough to persuade the Federal Reserve to hike more aggressively than it has been doing.
State of the Union Address
President Trump sets out his priorities for the year ahead and recaps the last 12 months in his first State of the Union address on Tuesday night. Following mixed messages on the US dollar, the main focus of the markets is trade and whether the administration plans to ramp up the protectionist agenda.
The Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) index, arrives on Monday after a sharp pullback in the US dollar and a rally in US Treasury yields. The data is the last of any real importance before the Federal Reserve convenes this week and will be important for shaping market expectations for USD.
Core PCE has undershot the Fed’s target since 2012 and the persistent lack of inflation last year surprised many. But the most recent CPI inflation figures may suggest we’re in for an uptick. The Labor Department’s core CPI reading rose 0.3% in December, the biggest advance in 11 months. It means core CPI rose 1.8% in 2017, up from 1.7% in the 12 months through November. With a tight labour market and inflationary pressures arguably building, the dollar may yet be able to find some support.
Hot off the heels of the PCE data is the first Federal Open Market Committee (FOMC) meeting of the year and the final one to be chaired by Janet Yellen before she hands over the monetary policy baton to Jerome Powell.
No change is expected at this meeting and it is seen as very much a changing of the guard moment, with the FOMC set to take on a more hawkish colour than it has under Yellen. Fed President Neel Kashkari and Chicago Fed President Charles Evans, both of whom voted against the December hike, rotate out this year. Meanwhile the more hawkish Cleveland Fed President Loretta Mester is among the new rate-setters for 2018. This, among other reasons, has markets starting to brace for as many as four hikes this year. However with no press conference or new economic forecasts, the first hike is not expected until March.
The monthly snapshot of labour market health comes on Friday with the nonfarm payroll numbers for January. Nonfarm payrolls rose by 148,000 in December, well below expectations of 190,000. Annual wage growth remained steady at 2.5%. Increasingly though, the effect these numbers have on short term interest rate expectations are playing second fiddle to more weighty market trends.
Netflix delivered a bumper set of quarterly earnings last Monday and this week it’s the turn of the other FAANG stocks to update the market. Facebook (FB) reports on Wednesday, with Apple (AAPL), Amazon (AMZN) and Alphabet (GOOGL) due to deliver their earnings updates to the market on Thursday.
FAANGs have delivered bumper returns in recent years and have been behind much of the gains for the Nasdaq 100 and the S&P 500.
Of note, Apple could be facing weaker iPhone X sales than previously expected, a factor behind the stock’s slide over the last week and a half. From Facebook, investors will want to hear what effect the recently-announced changes to news feeds will have on earnings growth.
Following the European Central Bank meeting last week, the focus is back on the data and important inflation and GDP prints are due in the coming days that will help persuade markets whether or not policymakers are able to start altering their forward guidance.
Preliminary flash GDP figures are due Tuesday, while the all-important core CPI estimates are released on Wednesday. This will show whether inflation is converging with the ECB’s target – a key requirement for the central bank to start reducing stimulus – or if it remains lacklustre. A poor core CPI number could at least slowdown the EUR juggernaut.
Source: ETX Capital