Market movers today
The main event today is the Riksbank’s monetary policy announcement in Sweden. There is a great deal of uncertainty related to this meeting as we’re set to get information about the the asset purchase programme (QE) going forward. Purchases started in February 2015 and by now the total holding of nominal bonds is around 45% of the stock (less in IL-bonds). In the meantime, inflation has risen and the scarcity of bonds has increased too. This is why we expect them to announce an end to QE, even though we admit it is a very close call. However, even so, purchases are unlikely to come to a standstill because of reinvestments and redemptions. We also expect the Riksbank’s rate path to remain unchanged, i.e. with the first rate hikes by late next summer. However, the ‘risk’ is that the first hike is delayed to avoid sending an unwarranted hawkish signal. Furthermore, in Sweden, the monthly NIER business and consumer confidence data is due. The thing to monitor here is if and to what extent recent nervousness about housing has affected consumers.
In the early hours of Thursday morning, the Bank of Japan (BoJ) will end its monetary policy meeting. We expect the BoJ to keep it s ‘QQE with yield curve control’ policy unchanged but we will be listening closely to the communication from Governor Haruhiko Kuroda during the press conference, as he might elaborate on recent tightening speculation.
Selected market news
It has been quiet overnight as market focus remains on the out look for US tax reform amid the two chambers of Congress set to pass the bill. Yesterday evening European time, the House of Representatives initially passed the bill with a 227 to 203 vote, with 12 Republicans and all Democrats voting against . However, according to House Majority Leader Kevin McCarthy, the House will have to vote on the bill again today as the draft voted on did not survive two provisions of Senate budget rules. The Senate is also set to vote on the bill today and at this stage it seems very likely that we will get the biggest overhaul of the US federal tax code in decades – a victory deemed very important for Republican chances of retaining control of Congress at next year’s mid-term elections. In terms of the actual growth impact, we think the effect will prove limited as the tax reform primarily benefits the wealthiest who have a lower marginal propensity to consume and as the out look for investment boost is dampened by the fact that credit has been cheap and easy in recent years. The risk to our call is that investments will rise more than expected as the demand for investments could see a boost .
We have witnessed a concerning worsening of the US-China relationship. Following a muchcelebrated visit to China by US President Donald Trump in early November, the US-China relationship has gone steeply downhill. Following a series of events from mid-November to now, Trump on Monday night stated that China and Russia are at tempting to erode American security and prosperity and that they are developing weapons that could threaten US critical infrastructure (see Flash Comment – US-China relations on a concerning path, 19 December). Following a period where imminent risk factors that could derail the global recovery were difficult to pinpoint, we now emphasise a heightened risk of trade conflict next year. Adding to fears is that Trump, going into the mid-term elect ions, seems to have wide backing at home for his confrontational course with China. Should the Republican lose its majority in the Senate or the House, it would also leave Trump with power only in the areas of foreign policy and trade.
