After the ECB last week, we have a very loaded week in terms of Central Banks. The Fed, RBA, Norges Bank will decide about their rates. Investors are now expecting the Fed to show some hints regarding its tightening path. For the time being, US financial markets are clearly driven by Trump. The US president promises that his fiscal reform to be the “largest ever”. We nonetheless remain suspicious as the failure of the Obamacare reform indicates strong difficulties for Trump to apply his program. Markets seem anyway quite confident about this reform (The corporate tax should be lowered to 15% from 35%) and the US equity market is trading around its all-time high levels (below 2’400 points for the S&P 500).
Regarding fundamentals, US first quarter data printed lower than expected, growth 0.7% q/q vs 2.1 expected and retail consumption have disappointed 0.3% versus 3.5 at Q4 2016. There is anyway one motive of satisfaction, business spending is trending higher and the US central bank may be very cautious by not raising rates too early. We do not forget that the US debt is so massive that increasing rates above 2% may prevent the country to service its debt. For the time being inflation is on the rise (2.4% y/y) is very useful to kill the debt.
At the moment, we are reloading our Eurodollar bullish position, the time for the Fed to provide markets with a strong hawkish signal.
By Yann Quelenn