31 Jan.-3Feb. 2017. Investment Weekly Outlook

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Headlines
Global equities were boosted this week by a reigniting of the Trump “reflation trade,” as the US President pushed ahead with a raft of executive orders, supporting optimism over the US economic outlook
The first estimate of US Q4 GDP showed growth of 1.9% qoq annualised, down from 3.5% in Q3 and below expectations of 2.2%
In the coming week, central bank meetings in the US, UK and Japan will be in focus.
US
In a heavy US data week, the highlight will be the first Federal Open Market Committee (FOMC) meeting of 2017. The FOMC is expected to keep the Fed funds target range unchanged at 0.50%-0.75%. It will be interesting to see if the statement reflects the increase in hawkish Fedspeak of late, in particular Fed Chair Janet Yellen’s more balanced labour market outlook, where she highlighted that cyclical labour market weakness has largely disappeared. Meanwhile, there has been little real change in activity data since the last statement in December, but market and consumer inflation expectations have rebounded. Any dissents would also be of interest and may help set the tone for the March meeting.
January’s employment report is forecast to show nonfarm payroll growth at 170,000, after a gain of 156,000 in the prior month. The 12-month moving average has drifted down from 263,000 in February 2015 to 180,000 in December 2016, reflecting a maturing labour market recovery that is still benefiting from low initial jobless claims and an elevated Conference Board labour market differential. The unemployment rate is expected to remain at 4.7%, while average hourly earnings are anticipated to rise 0.3% mom (+2.8% yoy), slightly lower than the 0.4% mom and 2.9% yoy seen in December.
Given that December’s ISM Manufacturing Index saw an acceleration of new orders (to 60.3 compared to 54.8 prior), the January print is expected to tick higher to 55.0 compared to 54.5 in the prior month. This would be the highest level since November 2014. Of slight concern, however, is the continued acceleration in the prices paid index, which rose in December to its highest level since June 2011. Meanwhile, January’s ISM Non-Manufacturing Index is anticipated to increase marginally (to 57.0 from 56.6), remaining at an elevated level, with both December’s robust business activity (61.4) and new orders (61.6) subcomponents providing encouragement for this release.
The Conference Board Consumer Confidence Index for January is anticipated to edge down slightly to 112.5 from 113.7 in December, although remaining at levels last seen in 2001. The surge in confidence since the US election may reflect consumers’ greater optimism about their personal finances, possibly on the back of proposed tax cuts.
November’s S&P CoreLogic Case-Shiller 20-City Composite Home Price Index is expected to rise by 5.0% yoy, roughly where it has been since September 2014. The monthly growth rate is seen at 0.6% mom. There remains some notable regional divergence, with October showing that Seattle (+10.7% yoy) continues to grow strongly, while New York (+1.7% yoy) lags somewhat. Overall, US home price growth remains stable, supported by low mortgage rates, growing demand and a limited supply of for-sale homes amid below-average growth in building activity.
Europe
At its February meeting, the Bank of England Monetary Policy Committee is expected to keep interest rates on hold. The resilience of UK activity data in the aftermath of last June’s Brexit vote amid rising inflationary pressures should also mean the bank does not extend its soon to expire gilt purchase programme. Conversely, a near-term rate hike to fend off inflation is unlikely given heightened Brexit-related political uncertainty and downside risks to growth in the coming quarters.
The flash estimate of January Eurozone CPI inflation is expected to show prices rising 1.5% yoy, the highest rate of expansion since July 2013, driven mainly by oil price effects. Underlying inflationary pressures are expected to remain subdued, however, with core inflation anticipated to remain at 0.9% yoy.
The first estimate of Q4 eurozone GDP is projected for growth of 0.4% qoq, 0.1 ppts faster than in Q3. Eurozone growth momentum remains underpinned by a gradually tightening labour market (supporting consumer spending), while the manufacturing sector has benefited from a recovery in eurozone fixed investment and a weaker euro.
Japan and emerging markets
At its two-day monetary policy meeting, the Bank of Japan (BoJ) is likely to keep its policy – currently based on the yield curve control framework – unchanged. Inflation is expected to rebound during the first half of 2017 on heightened imported inflation and a gradual closing of the output gap. The BoJ will also update its economic forecasts, with a possible upward revision of its GDP growth numbers for the next two fiscal years.
Industrial production for December is expected to increase for the fifth consecutive month (+0.3% mom) as rising machinery orders and a weaker yen, along with global restocking, benefit Japanese producers. The manufacturing PMI rose in December to its highest level since March 2014 and the Ministry of Economy, Trade and Industry survey of production forecast showed a 2.0% mom expected increase, followed by 2.2% in January.
In Turkey, CPI inflation is expected to have risen to 8.6% yoy in January, up from 8.5% registered in December. A sharp increase in unprocessed food prices due to cold weather and a pass-through from a weaker lira are likely to be the main drivers of the uptick.
Regards All.
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