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Friday March 24: Five things the markets are talking about

Markets remain in "wait and see mode" - Can Trump's self-proclaimed "infamous" negotiation skill push through his health care bill?

This bill is viewed as a potential bellwether for his ability to impose his economic and political agenda.

Thus far, delayed is better than defeat. Investors regard today's healthcare bill vote as "the" test for the Trump presidency. The GOP pulled the healthcare bill vote late yesterday afternoon to hold more meetings with the holdout Freedom Caucus. However, there is still lack of clarity in whether the White House has been able to appease the hard-right opponents with an amendment that does away with "essential benefits" clause while preserving the support of the moderates.

Net result, Trump's reflation trade has struggled this month as the administration remains far from delivering on pro-growth policies that boosted stocks and the dollar.

On the radar, more Fed officials are lined up for today, including Fed Bank of St. Louis President James Bullard, who will speak to the Economic Club of Memphis.

1. Japanese equities lead gains in Asia Pacific, Europe neutral

Despite losing -1.3% on the week, Japan's Nikkei has ended up +0.9% overnight and has moved decisively away from the previous session's two-month lows. The broader Topix index has also recovered some of this week's slide as the yen (¥111.18) halted its longest rally outright in six-year.

In Hong Kong, stocks have eked out marginal gains as investors wait for corporate earnings and today's U.S healthcare bill vote. The benchmark Hang Seng index added +0.1%.

In China, stocks have rallied for a second week as infrastructure spending has offset liquidity fears. The blue-chip CSI300 index rose +0.8%, while the Shanghai Composite Index added +0.6%.

In Europe, equity indices are trading lower as the market remains nervous ahead of U.S healthcare vote. Financials are leaning on Eurostoxx, while commodity and mining stocks are trading higher in the FTSE 100.

Overnight, U.S. stock futures have rallied (+0.2%) now that Republicans said the House was ready to vote on an amended health-care bill.

Indices: Stoxx50 -0.3% at 3,442, FTSE -0.1% at 7,336, DAX flat at 12,035, CAC-40 -0.3% at 5,017, IBEX-35 -0.4% at 10,288, FTSE MIB -0.2% at 20,134, SMI -0.2% at 8,613, S&P 500 Futures +0.2%

2. Saudi's cut oil supply to the U.S

Oil prices have edged a tad higher overnight, supported by a fall in Saudi exports to the U.S, however, the market remains under pressure from a supply glut.

Brent crude futures at +$50.69 per barrel are up +13c or +0.3% from yesterday's close. U.S. West Texas Intermediate (WTI) crude futures are up +18c, or +0.4%, at +$47.88 a barrel.

On the week, Brent is heading for a weekly fall of about -2%, while WTI is off -1.8%.

Support has come from the Saudi's who indicated that crude exports to the U.S would fall by around -300k bpd between February and March.

Note: Saudi exports are competing with U.S shale production, which is up about +9% in the past 18-months.

Currently, the market believes that OPEC needs to extend its production curbs beyond June or makes bigger cuts or oil prices are at risk of falling much further.

Note: Despite the OPEC-led cuts that began three months ago, Brent has fallen by over -13% now that other producers have stepped up and filled the gap.

Gold prices have edged lower overnight (-0.2% at +$1,242.31 per ounce) on the back of a stronger dollar. Today's healthcare vote defeat will affect Trump's efforts to cut taxes and boost infrastructure and should drive more investors to gold as a safe haven.

3. Global yields need guidance

With market risk sentiment being somewhat fragile given the uncertainty on whether Trump can deliver on stimulus expectations has been supporting U.S treasuries and bunds prices this month.

In the U.S, 10-year yields rose above +2.6% earlier this month and reached a two-year high as investors anticipated the Fed would raise short-term interest rates. They did last week, but its signal of a "gradual" path of tightening policy has debt product better bid. U.S 10's are trading at +2.43%. German bunds are trading just above +0.5%.

In the U.K, yields on 10-year gilts have backed up +1 bps to +1.19% after data showed yesterday showed that U.K retail sales rose beating expectations.

Elsewhere, the Reserve Bank of New Zealand (RBNZ) held rates steady Wednesday (+1.75%) as expected and maintains a neutral policy stance. In its policy statement, officials expressed more concern over housing inflation while reiterating that the exchange rate should depreciate more to achieve balanced growth.

The yield on Aussie 10's are little changed at +2.75%.

4. Dollar waiting for vote outcome

Currently, FX price action and risk outlook continues to hinge on President Trump's healthcare bill vote this afternoon (no time set).

The EUR is trading back above the psychological € 1.0800 handle (€1.0810) supported by today's EU Manufacturing PMI print (see below) exceeding expectations and rallying further into expansion territory to new multi-year highs.

The pound is a tad lower (£1.2483) in quiet trading. Next week PM Theresa May is expected to begin divorce proceedings from the EU.

USD/Yen has moved off yesterday's lows to stay above the psychological ¥111.00 handle. It's the first day that the 'mighty' dollar has rallied in eight days.

5. Eurozone Composite PMI Highest in Six Years

Data this morning shows that the Eurozone grew at the fastest pace in six-years in Q1. The PMI for the eurozone's manufacturers and service providers rose to 56.7 in March from 56.0 in February.

With new orders also surging and businesses hiring additional workers at the fastest pace in a decade, the three monthly average rally may suggest a faster rate of expansion is likely to be sustained over coming months. There were also signs the pickup in activity is fueling inflationary pressures, with prices charged by businesses rising at the fastest rate in six years.

Data like this will have fixed income traders raising their expectations that the ECB should consider moderating its stimulus measures later this year. Market expectations were for a drop.

Spot Gold eases from fresh high at $1253 (the highest traded since 28Feb) after Thursday's close in red that signaled broader bulls might be running out of steam.

Overbought slow stochastic on daily chart is reversing lower and supports idea of extended correction.

Downside attempts remain limited for now and keep pivotal supports at $1239/37 (base of thick hourly cloud / broken Fibo 61.8% of $1263/$1195 descend) intact.

However, extended dips through $1239/37 should not exceed next strong support at $1229 (daily Kijun-sen / 10/20SMA bull-cross) to keep broader bulls from $1195 trough intact for eventual push towards targets at $1260/63 (200SMA / 27 Feb peak).

Res: 1246; 1253; 1258; 1260
Sup: 1241; 1239; 1237; 1229

EURUSD

The EURUSD had another indecisive movement yesterday. The bias remains neutral in nearest term. Price is still trending higher in short term, moving above the EMA 200 and a trend line support as you can see on my H1 chart below but from a daily chart perspective 1.0830 – 1.0873 resistance area also remains well-respected and good place to sell with a tight stop loss. Key intraday support is seen around 1.0725 located around the EMA 200 and the trend line support. A clear break and daily/weekly close below that area would end the current short term bullish trend. On the upside, a clear break and daily/weekly close above 1.0873 would activate my bullish mode next week targeting 1.1000 region.

GBPUSD

The GBPUSD had a bullish momentum yesterday topped at 1.2531. Price is still moving confidently inside the bullish channel and above the EMA 200 as you can see on my H1 chart below. The bias remains bullish in nearest term testing 1.2570 – 1.2600 region. Immediate support is seen around 1.2475. A clear break below that area could lead price to neutral zone in nearest term testing 1.2420 but only a clear break back below the EMA 200 (1.2380) would interrupt the current bullish phase. Overall I remain neutral.

USDJPY

The USDJPY was indecisive yesterday but overall still able to maintain its bearish bias. The bias is bearish in nearest term testing 110.25/00 region. As you can see on my daily chart below, price slipped below 111.30 key support but still struggling around the daily EMA 200 located around 111.00. So from a longer term daily chart perspective we may need to wait until price convincingly close below 111.30/00 to expect a deeper movement to the downside. On the other hand, any sustained pullback above 111.30 could trigger further bullish pressure testing 111.80 or higher.

USDCHF

The USDCHF didn’t make significant movement yesterday. There are no changes in my technical outlook. The bias remains neutral in nearest term but price is still in a bearish phase after fell below the bullish channel as you can see on my H4 chart below targeting 0.9870 – 0.9800 support area. Immediate resistance is seen around 0.9975. A clear break above that area could trigger further bullish pullback testing 1.0015. Overall I remain neutral.

FTSE is struggling to break above two-day congestion despite today's opening higher, as near-term technicals are weak and overall sentiment ahead of start of Brexit negotiations remains negative.

The index is down around 1.5% for the week until now, with negative near-term outlook also driven by strong pound.

Pullback from fresh record high at 7444 was so far contained by 55SMA, with subsequent consolidation being unable to extend recovery and generate bullish signal for now.

Near-term price action is moving within thick hourly cloud (spanned between 7256 and 7297) and so far holding well below pivotal barriers at 7297 (hourly cloud top) and 7310 (Fibo 38.2% of 7444/7228 pullback), break of which is needed to generate stronger bullish signal.

Long red weekly candle also weighs on the price and maintains downside pressure.

Bearish scenario requires break below 7228 (55SMA / near-term base) for confirmation and extension towards next strong supports at 7184 (Fibo 61.8% of 7024/7444) and 7169 (top of ascending daily cloud).

Res: 7283, 7897, 7310, 7324
Sup: 7259, 7228, 7184, 7169

Gold Few selling pressures.

Gold has risen sharply, nearly invalidating the bearish short-term outlook. The momentum seems back to bullish. Strong resistance is located at 1263 (27/02/2017 high). Hourly support can be found at 1224.10 (16/03/2017 low). Expected to show further strengthening.

In the long-term, the technical structure suggests that there is a growing upside momentum. A break of 1392 (17/03/2014) is necessary ton confirm it, A major support can be found at 1045 (05/02/2010 low).

Silver Increasing demand.

Silver rose sharply Friday, invalidating the bearish outlook linked to the previous bearish pause. Correct pullback has failed to find seller indicating test of 17.56 resistance (16/03/2017 high). Strong support is given at 16.84 (27/01/2016 low).

In the long-term, the death cross indicates that further downsides are very likely. Resistance is located at 25.11 (28/08/2013 high). Strong support can be found at 11.75 (20/04/2009).

Crude oil Heading downwards.

Crude oil's bearish pressures continues despite correct bounce due to a short-squeeze. The commodity had been unable to mount a serious challenge to resistance at 49.61 (08/12/2017 low) hourly support given at 47.09 (016/03/2017 low) Expected to see deeper selling pressures.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness are very likely. Strong support lies at 24.82 (13/11/2002) while resistance can now be found at 55.24 (03/01/2017 high).

EUR/CHF Moving sideways.

EUR/CHF's is moving up and down. The medium-term pattern suggests us to see continued bearish pressures towards key support that can be found at 1.0623 (24/06/2016 low).

In the longer term, the technical structure is mixed. Resistance can be found at 1.1200 (04/02/2015 high). Yet,the ECB's QE programme is likely to cause persistent selling pressures on the euro, which should weigh on EUR/CHF. Supports can be found at 1.0184 (28/01/2015 low) and 1.0082 (27/01/2015 low).

EUR/JPY Continued bearish pressures.

EUR/JPY rejection at 122.88 has triggered a correction. The pair is also very volatile. Hourly support at 120.55 (17/01/2017 low) has been broken. Another support at 120.02 (08/03/2017 low) has been broken. Resistance stands at 122.88 (13/03/0217 high). Expected to show continued weakness.

In the longer term, the technical structure validates a medium-term succession of lower highs and lower lows. As a result, the resistance at 149.78 (08/12/2014 high) has likely marked the end of the rise that started in July 2012. Strong support at 94.12 (24/07/2012 low) looks nonetheless far away.

EUR/GBP Continued weakness but...

EUR/GBP is correcting lower. Yet there is the formation of a bullish flag which suggests reversal of current weakness targeting 0.9000. Key resistance is given at 0.8854 (15/01/2017 high) and other resistance can be found at 0.8787 (13/03/20167 high). Support is located at 0.8645( 05/02/2017 low).

In the long-term, the pair has largely recovered from recent lows in 2015. The technical structure suggests a growing upside momentum. The pair is trading above from its 200 DMA. Strong resistance can be found at 0.9500 psychological level.

USD/CHF Selling pressures decline.

USD/CHF is declining. Hourly support is given at 0.9862 (31/01/2017 low). Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to show continued weakness.

In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

USD/CAD Holding below 1.3400.

USD/CAD is bouncing. However a break of resistance area around 1.3400 is needed to invalidate the current short term bearish technical structure. The road seems still wideopen for larger decline. Key support is given at 1.2969 (31/01/2017 low).

In the longer term, there is a golden cross with the 50 dma crossing the 200 dma indicating further upside pressures. Strong resistance is given at 1.4690 (22/01/2016 high). Long-term support can be found at 1.2461 (16/03/2015 low).

AUD/USD Bouncing lower.

AUD/USD has failed to test the key resistance at 0.7778 (08/11/2016 high). Hourly support at 0.7664 (16/03/2017 low) has been broken. Expected to see some short-term weakness towards resistance area around 0.7500.

In the long-term, we are waiting for further signs that the current downtrend is ending. Key supports stand at 0.6009 (31/10/2008 low) . A break of the key resistance at 0.8295 (15/01/2015 high) is needed to invalidate our long-term bearish view.

EUR/USD Trading within uptrend channel.

EUR/USD keeps on pushing higher, even though the pair is now pausing around 1.0800. A break of the upside channel would signal persistent buying pressures. Key resistance is given at a distance 1.0874 (08/12/2017 high). Strong support can be found at 1.0493 (22/02/2017 low). The technical structure suggests deeper increase towards resistance at 1.0874.

In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD Pushing higher.

GBP/USD now lies in a short-term uptrend channel. There are rooms for further strength. Hourly resistance is located at 1.2570 (24/02/2017 high). Hourly support is given at 1.2324 (03/17/2017 low). Expected to show continued strength.

The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY Consolidating.

USD/JPY has failed to break key resistance given at 115.62 (19/01/2016 high) confirming persistent selling pressures. The pair has broken strong support at 111.36 (28/11/2016 low). Hourly resistance can be located at 113.57 (16/03/2017 high).

We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low)

News and Events:

USD in the doldrums ahead of key vote

The end of the week was particularly tense in the FX market after the much-awaited vote from the House of Representatives on the plan to repeal and replace parts of the Affordable Care Act. The US dollar has been trading in a volatile range against most of its counterparts as market participants grow impatient. It may seem surprising that the market is monitoring closely the development of this specific subject as it will not be a game changer for the US economy. In fact, it is widely seen as a test for Donald Trump and his ability to pass the promised reforms. In short, if Obamacare is not repealed, it will seriously damage the market’s confidence and would most likely trigger a sell-off in the equity market and increase selling pressure on the USD.

After sliding 0.25% during the Asian session, the single currency rapidly returned above the 1.08 threshold as European traders stepped in. The dollar index was in free fall as it tumbled 0.30% in a couple of hours to reach 99.697. EUR/USD is currently testing a key resistance area at around 1.08 (Fibo 38.2% on May 2016 - January 2017 debasement at 1.0828 and previous highs); if broken the door is wide open towards 1.10.

Russia set to hold rates unchanged at 10%

The Central Bank of Russia is due to announce its key rate decision later this morning but we believe that rates will remain unchanged at 10%.

The ruble has been strengthening since the beginning of the year, providing some room for the central bank to lower rates, but we think that inflation expectations are still too high. Even though inflation is dropping at a fast pace it still lies at 4.4% y/y and should prevent the central bank from lowering rates to 9.75%.

The CBR’s cautiousness since its last meeting was mostly due to the Fed hiking rates and although dollar demand should strengthen, the ruble has been performing well. Nevertheless, weaker global oil prices are adding downside pressures on the ruble.

Finally, global uncertainties continue to linger and the central bank has already announced that it will not rush to cut rates. It is likely that policymakers are waiting for GDP to enter positive territory before making any serious moves. For the time being, we maintain our bullish stance on the ruble.

Today's Key Issues (time in GMT):

• Mar P Markit France Manufacturing PMI, exp 52,4, last 52,2 EUR / 08:00
• Mar P Markit France Services PMI, exp 56,1, last 56,4 EUR / 08:00
• Mar P Markit France Composite PMI, exp 55,8, last 55,9 EUR / 08:00
• mars.17 Money Supply Narrow Def, last 8.86t RUB / 08:00
• Feb PPI MoM, last 1,90% EUR / 08:00
• Feb PPI YoY, last 7,50%, rev 7,60% EUR / 08:00
• Italy's Padoan, EU's Dombrovkis Meet in Rome EUR / 08:00
• Mar P Markit/BME Germany Manufacturing PMI, exp 56,5, last 56,8 EUR / 08:30
• Mar P Markit Germany Services PMI, exp 54,5, last 54,4 EUR / 08:30
• Mar P Markit/BME Germany Composite PMI, exp 56, last 56,1 EUR / 08:30
• Mar P Markit Eurozone Manufacturing PMI, exp 55,3, last 55,4 EUR / 09:00
• Mar P Markit Eurozone Services PMI, exp 55,3, last 55,5 EUR / 09:00
• Mar P Markit Eurozone Composite PMI, exp 55,8, last 56 EUR / 09:00
• Feb BBA Loans for House Purchase, exp 44900, last 44657, rev 44142 GBP / 09:30
• ECB's Angeloni speaks in Milan EUR / 10:15
• mars.24 Key Rate, exp 10,00%, last 10,00% RUB / 10:30
• Fed's Evans Speaks at Community Development Event USD / 12:00
• Bank of Russia Governor Nabiullina holds news conference RUB / 12:00
• Feb CPI NSA MoM, exp 0,20%, last 0,90% CAD / 12:30
• Feb CPI YoY, exp 2,10%, last 2,10% CAD / 12:30
• Feb CPI Core- Common YoY%, last 1,30% CAD / 12:30
• Feb CPI Core- Median YoY%, last 1,90% CAD / 12:30
• Feb P Durable Goods Orders, exp 1,30%, last 2,00% USD / 12:30
• Feb CPI Core- Trim YoY%, last 1,70% CAD / 12:30
• Feb P Durables Ex Transportation, exp 0,60%, last 0,00% USD / 12:30
• Feb Consumer Price Index, last 129,5 CAD / 12:30
• Feb P Cap Goods Orders Nondef Ex Air, exp 0,50%, last -0,10% USD / 12:30
• Feb P Cap Goods Ship Nondef Ex Air, exp 0,20%, last -0,40% USD / 12:30
• Fed's Bullard to Speak to Economic Club of Memphis USD / 13:05
• Feb Current Account Balance, exp $0m, last -$5085m BRL / 13:30
• Feb Foreign Direct Investment, exp $5000m, last $11528m BRL / 13:30
• Mar P Markit US Manufacturing PMI, exp 54,8, last 54,2 USD / 13:45
• Mar P Markit US Services PMI, exp 54, last 53,8 USD / 13:45
• Mar P Markit US Composite PMI, last 54,1 USD / 13:45
• Revisions: Wholesale sales and inventories USD / 14:00
• Fed's Dudley Speaks in New York at York College USD / 14:00
• Feb Total Jobseekers, exp 3457.0k, last 3467.9k EUR / 17:00
• Feb Jobseekers Net Change, exp -10, last 0,8 EUR / 17:00
• Fed's Williams Speaks in Q&A USD / 17:30
• Feb Tax Collections, exp 93000m, last 137392m BRL / 22:00

The Risk Today:

EUR/USD keeps on pushing higher, even though the pair is now pausing around 1.0800. A break of the upside channel would signal persistent buying pressures. Key resistance is given at a distance 1.0874 (08/12/2017 high). Strong support can be found at 1.0493 (22/02/2017 low). The technical structure suggests deeper increase towards resistance at 1.0874. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD now lies in a short-term uptrend channel. There are rooms for further strength. Hourly resistance is located at 1.2570 (24/02/2017 high). Hourly support is given at 1.2324 (03/17/2017 low). Expected to show continued strength. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY has failed to break key resistance given at 115.62 (19/01/2016 high) confirming persistent selling pressures. The pair has broken strong support at 111.36 (28/11/2016 low). Hourly resistance can be located at 113.57 (16/03/2017 high). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is declining. Hourly support is given at 0.9862 (31/01/2017 low). Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to show continued weakness. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

Today's key points

• Rising risk of a market correction.
• Less support to risk sentiment as we are close to a peak in global PMIs and the risk of Trump disappointing the markets is increasing.
• Monetary policy set to stay accommodative in both the US and Europe.
• Changes to US economic policy are likely to come later and be smaller than previously expected.
• The risk of a US military conflict with North Korea is rising.

In Strategy: Three reasons why bond bears should be careful, 17 March, we warned there was a rising risk of a market correction. This week we saw the biggest one-day fall in S&P 500 since October 2016. Two main ingredients have driven stocks higher since the trough at the beginning of November. The first and, in our view, most important factor has been the turn in the global business cycle, as we are in the strongest synchronised economic recovery since 2009. The second factor has been expectations of more growthfriendly economic policy under President Donald Trump. While accelerating growth and expectations of more growth-friendly economic policy have supported risk sentiment over the past six months, we are now close to a peak in PMIs and we believe the risk of Trump disappointing the markets is increasing.

While our MacroScope short-term models remain strong across regions, our mediumand long-term models have weakened. This suggests we are close to the peak in global PMIs, after they increased sharply across regions over the past six months. This does not mean the economic recovery is set to pause but that growth is no longer accelerating. As we argued last week, whether or not growth is accelerating is the key driver for a bond bear market, not the level of growth. This week, the rally in US fixed income following the Fed meeting continued and US 10-year Treasury yields are now trading at 2.4%. While a peak in PMIs means less support for equities, we are still positive on stock markets in the medium to long term, as we expect global growth to pick up in 2018. A correction in the market would just lead to a pause in the longer term bull trend and we still like to buy on dips.

In recent months, headline CPI inflation has moved higher in both the US and Europe supported by the base effects of energy prices adding fuel to the reflation trade. The Brent oil price hit the bottom in January/February 2016 but recovered afterwards. This means the positive contribution to inflation from a higher oil price is fading (especially after the recent oil price fall from around USD55/bl to USD51/bl) unless the oil price moves higher again.

In our checklist for reflation, we mentioned four key factors for reflation, one of them being easy monetary policy (see also Strategy: The case for reflation – what it means and what to watch, 18 November). As we expect CPI inflation in the euro area to fall again to just above 1% in early 2018 and the ECB's core inflation forecast is too optimistic (see also ECB's core inflation forecast is still too optimistic, 14 March), we stick to our long-held view that the ECB will extend its QE purchases beyond December 2017. Although the Fed, as expected, moved on with its hiking cycle by increase the target range by 25bp to 0.75-1.00% last week, Fed Chair Janet Yellen indicated that it would be too early to remove accommodation completely. While the Fed still projects a total of three hikes this year, four hikes would be one too many, as it would make monetary policy neutral instead of accommodative, see FOMC Review: Fed says it is on track, not more hawkish, 15 March. With very low inflation expectations and core inflation still below the 2% target, the Fed has room to stay patient removing accommodation completely, especially as there are still indications of slack in the US labour market. If necessary, the Fed will postpone the next hike to avoid a repetition of what happened from 2014-16, when too-tight US monetary policy contributed to the fall in real GDP growth, commodity prices and inflation expectations.

Trumponomics postponed further

We have become more pessimistic on the outlook for Trumponomics in recent weeks, as we view the 'repealing and replacing' of Obamacare as a proxy for what to expect of Trumponomics. Changes to US economic policy are likely to come later and be smaller than previously expected due to the chaos within the Republican Party. Although replacing Obamacare has been very high on the agenda for both President Trump and the House Speaker Paul Ryan, the process has dragged on and it has begun to look like a crucial blow for the Republicans, as the moderate and more conservative Republicans are fighting each other about how to proceed. The vote in House of Representatives, which was supposed to be held yesterday, has been postponed to later today but may be postponed further if President Trump and House Speaker Paul Ryan do not have enough Republicans on board to win the vote. Even if the healthcare bill passes the House of Representatives, it may be dead on arrival in the Senate where the Republicans have a slimmer majority, see the article 'House Obamacare repeal DOA in the Senate', from POLITICO, 22 March 2017. Due to the political process of passing a new healthcare plan in order to avoid being filibustered by the Democrats in the Senate, the Republicans cannot get going with tax reform before an agreement on healthcare has been reached. The technical explanation is that the healthcare plan is attached to the 2017 budget resolution, while the tax reform will be attached to the 2018 budget resolution and there cannot be two outstanding budget resolutions at the same time. Although we still think the debt limit will be raised or resuspended eventually (see Research US: Debt limit suspension expires tomorrow, 14 March), the chaotic situation within the Republican Party also questions how quickly they can reach a deal here.

This weekend White House budget director Mick Mulvaney said that Trump's full budget will be released in mid-May, which, in our view, raises questions about whether the Treasury Secretary has enough time to reach a deal on a tax reform before Congress's August recess. We have argued for a long time that it will take time to pass changes to economic policy, meaning that the biggest real growth impact would be in 2018 due to policy lags. With this new information, we think a deal on a tax reform is more likely to be reached in late Q3 17 or even Q4 17, meaning the real growth impact would be in Q2 18 at the earliest, in our view. That said, the Fed has clearly indicated that it wants to offset more expansionary fiscal policy, although it welcomes reforms that increase productivity growth.

North Korea raises US-China tensions

While markets seem less worried about European politics following the Dutch election and the (so far) strong performance by Emmanuel Macron in France, we are about to face the first test between President Trump and China, as the risk of a US military conflict with North Korea is rising. This week North Korea made its third missile launch test this year and, although it failed, North Korea is determined to develop an intercontinental ballistic missile, which would be able to reach the US. Although it is not there yet, it is getting closer. The North Korea issue is just one of many possible confrontations between the US and China and is likely to be a key issue at the meeting between President Trump and Chinese president Xi Jinping scheduled for 8-9 April. With China's softer stance of going to the negotiation table with North Korea and President Trump's increasing impatience, North Korea is another area of conflict bears are following closely (see also Research: North Korea raises US-China tensions, 10 March). The rising tension between the US and China also means we see a risk of a trade war between the two countries (see also Research: Don't rule out a US-China trade war just yet, 21 February).