Macro Insights: ECB policy normalisation on track; US economic momentum robust amid global trade tensions

ECB policy normalisation, US economic momentum amid global trade tensions

Macro insights

ECB policy normalisation on track, US economic momentum robust amid global trade tensions

Bye bye bias. Thursday’s European Central Bank meeting saw the Bank drop its explicit reference to providing increased quantitative easing if needed. The removal of this QE easing bias confirms the ECB’s on-going policy normalisation, but ECB President, Mario Draghi, downplayed the move referring to it as a “backward-looking measure”. The meeting also delivered the latest ECB staff forecasts with a modest upgrade to its 2018 growth estimate from 2.3% to 2.4%, while its inflation forecast was moved down a notch from 1.5% to 1.4% on the back of higher oil prices and strong currency.  Market reaction was muted following the meeting with both the euro and bond yields broadly stable. We still expect the ECB to announce the end of its QE programme at the June meeting, extending it for only a few months (until end 2018) if at all.

Global trade developments dominated last week. The impact of US steel and aluminium tariffs will depend on their final coverage but, as we discuss in our recent note  'US moves push protectionist fears toward reality', we expect these to fall short of a “trade war”. Canada and Mexico were excluded from the tariffs, likely related to ongoing North Atlantic Free Trade Agreement negotiations, which have made tentative progress. The next round of negotiations is scheduled for early April, but reaching an agreement before either the Mexican elections (July) or the US mid-term elections (November) looks optimistic, with ongoing threats of US withdrawal likely to be a continuing source of tension. Emerging Asian countries (namely China, Korea, Taiwan and India) will be hit by Trump’s latest tariffs on steel and aluminum imports. Meanwhile, a report into China’s treatment of intellectual property rights expected over the coming months is likely to trigger a further wave of protectionism. The Lunar New Year has created distortions in trade numbers with China reporting a strong surge in exports while Korea and Taiwan’s trade slowed. Looking through this, EM Asia trade appears to have started the year on a strong note, following some softness in the fourth quarter of 2017. We continue to expect export growth to remain robust, although moderating from last year due to slowing Chinese demand, increasing risks around protectionism, and some slowdown in technology sector momentum.

US payrolls post the largest monthly gain since mid-2016 and inflation looks set to edge higher. Payroll numbers surged by 313,000 in February, driven by employment in the construction and retail trade sectors. Unemployment remained at 4.1%, while wage growth retreated to 2.6% from 2.8%. We do not expect labour supply to keep pace with demand over the coming months and expect unemployment to fall below 4%. February’s consumer price inflation numbers look set to edge higher. Consensus expectations are at 2.2%, although we see some upside risk. Strong labour market momentum will likely underpin the US Federal Reserve switching to an outlook of four hikes in 2018 from three at its next meeting on 21 March. February’s retail sales are also expected to rise alongside industrial output figures this week. These will help shape the outlook for first quarter GDP (due 27 April), which we currently expect to come in at 2.4% annualised. This week, Congress will also consider the passage of financial deregulation and may vote on a government spending bill ahead of a 23 March deadline.

An important week for euro area credit rating reviews. On 16 March rating reviews are due for several euro area countries. S&P is set to issue reviews for Austria, Cyprus, Finland, and Portugal, while Italy awaits one from both Moody’s and Fitch. As a reminder, Moody’s confirmed its Baa2 rating for Italy last October but with a negative outlook, while Fitch cut the country’s rating to BBB from BBB+ in April 2017. We expect both Fitch & Moody’s to confirm their ratings. However, the outcome of the recent general elections has reduced the odds of Moody’s removing its negative outlook, given that a hung parliament reduces the visibility of reform momentum, which was part of the rational for the negative outlook.

Upcoming events:
Euro area: EMU January Industrial Production (Wednesday), Germany expected to form a government by end of week
US: Treasury budget statement (Monday), inflation figures (Tuesday), retail sales numbers (Wednesday)
UK: OBR forecast updates and spring fiscal statement (Tuesday)
Others: OPEC oil market report (Wednesday), China retail sales and industrial production (Wednesday)
Rating reviews on Friday: Italy rating review from Moody’s (Baa2) and Fitch (BBB), S&P reviews for Austria, Cyprus, Finland and Portugal.

Market and asset types measured by the following indices: Equities = MSCI. Fixed Income = JP Morgan and BofAML.  

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