U.S. inflation: Trump's timing

U.S. inflation: Trump's timing

Consumer prices augur well for growth for the new administration; formal Brexit talks break out; China's consumers step forward; Argentina's bonds are well-bid


"The currency is very, very strong. We just have to protect our U.S. companies so they’re not forced abroad."
Steven Mnuchin, Trump's nominee for U.S. Treasury Secretary

U.S. inflation: Trump's timing With the Presidential inauguration as backdrop, new inflation data signaled a gathering growth story. Consumer prices for December rose for a 5th consecutive month, up 0.3% from November, reaching a year-on-year growth rate of 2.1%, the largest 12-month increase since the period ending June 2014.  Ex food and energy, the December monthly and annual rates were 0.2% and 2.2%, respectively. While these figures were higher than the Federal Reserve's (Fed) inflation target of 2%, the Fed's preferred measure hasn't yet reached that level; the Personal Consumption Expenditure (PCE) deflator rose only 1.4% year-over-year in November, the most recent available figure.  

The inflation stats matter for three reasons: first, they suggest economic growth continued at the end of 2016, supporting expectations for a strong corporate earnings season – and by extension, current equity market valuations.  Second, moderate pricing strength strengthens the FOMC's stated commitment to gradually raise the fed funds target rate during 2017. And third, they augur well for the possibility of continued growth in the new Trump administration. 

 

U.K. and Europe: Breaking bad? In outlining her government's 12 priorities for negotiating the UK’s departure the EU, Prime Minister Theresa May left some pro-Brexit hard-liners with the impression that she supported their cause.  Former UK Independence Party (UKIP) leader and Brexit supporter Nigel Farage called the speech "real progress". But some of the stated priorities seemed in line with a more conciliatory approach – including giving both houses of Parliament a vote on the terms of a final agreement, and trying to strike a trade deal as an "associate member" of the EU's single market. Thus, the speech appeared to contain enough to mollify both sides of the issue within the U.K., and could have also been designed to generate yet more opposition from the rest of the EU, to shore up support from the pro-Brexit crowd.

 

Argentina: Just-in-time bonds The government's offer of $7 billion 5- and 7-year bonds, priced to yield 5.625% and 7% respectively was met with demand for $22 billion, according to government sources – a strong welcome back by global markets. For Argentina, the closing of the sale removes some uncertainty over what the rate environment will be for emerging-market (EM) issuers after the Trump administration takes office. Borrowing costs for EM issuers jumped in the immediate aftermath of the U.S. election, reportedly persuading Latin American issuers to postpone at least $10 billion of international issues. But rates have receded since, encouraging issuers to close deals rapidly.

 

China: Consumers carry the day The final quarter of 2016 saw China's economy accelerate for the first time in two years – thanks in part due to retail sales -- with GDP rising 6.8% in the three months through December, from the year-ago period – slightly above expectations. Retail sales increased 10.9% from the year-ago December, above expectations, while industrial production rose 6%. Some of the fuel from this growth also came from loan growth of 15.4%, with outstanding credit now estimated to have reached over 2.6 times GDP. In order to support growth while keeping downward pressure off the yuan in the run-up to the end-of-January week long Lunar New Year holiday, the central bank injected a total of 845 billion yuan ($122.7 billion) into the financial system during the week, as of January 17th.

 

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