Without pain there is no gain

The first central bank meeting of the year provided no surprises. The ECB left interest rates where they were, as expected, and reiterated that the current interest rate policy would remain in place well beyond the end of the bond purchase program. There was some dissent in the ranks however as some ECB members wanted to commit to putting a firm date of September this year to end the bond purchase program. The euro was little changed, to modestly higher against the U.S. dollar post the announcement. The overall dovish statement was reiterated by the comments from Mario Draghi, at the following press conference.

The pound keeps rising, now trading close to $1.43, reinforcing the view that markets travel in the direction that causes the most pain. Currencies are notorious for their difficulty to predict. Last year’s falling U.S. dollar baffled most experts and the pounds continual rise this year is doing the same thing.  The FTSE 100 index, which had up until Wednesday been largely ignoring the rise in the pound, did finally react falling close to 1% on the day. 

Having attended several analyst strategy meetings over the past few days, the consensus view is that inflation is finally going to reappear this year. Certainly, that is what the market also believes if sector rotation is anything to go by, yields will go higher. The last time the US economy received a fiscal stimulus was 2003, and this resulted in quite a sharp selloff in bonds and does appear to have been the catalyst for wage growth. Donald Trump’s policies on Fiscal, monetary, trade and financial regulation are all liable to further stimulate inflationary pressures. So, the questions then are will the Federal Reserve be forced to react faster or are they happy to let the economy run “hot”? Again, the consensus is that they will be happy to let the economy run a little ahead of itself. It’s no coincidence that a dovish Fed Chair was chosen to replace Janet Yellen. 

Later on Friday, we get the first reading of GDP growth for the fourth quarter of last year for both our economy and the American one. Expectations for the UK economy that it grew at 1.7% last year and 0.4% in the last quarter. For the US economy expectations are that the economy grew at 3.2% for the past year. We also get some inflation data for the US economy in the form of personal consumption expenditure prices. Both these pieces of data have the potential to impact bond and therefore equity markets.

Posted on January 25, 2018 .