Week in Review: Outlook for Central Banks Turning Cloudy

For the week ending 18 August 2017

  • Fed, ECB wrestling with weak inflation backdrop
  • Trump disbands business councils
  • North Korea backs off Guam threat
  • USTR to investigate China trade practices
  • UK lays out Brexit positions

Global equities gave up midweek gains and headed into the weekend little changed. A renewed surge in volatility was sparked by concerns that fresh White House turmoil could imperil President Donald Trump’s pro-growth agenda. Adding to volatility was a terrorist attack in Barcelona that killed 14. The combination helped drive the Chicago Board Options Exchange Volatility Index (VIX) back up to 14.75 early Friday after the index declined to 11.25 on Wednesday. US 10-year Treasury note yields edged lower on the week, to 2.19% from 2.21% a week earlier, while the price of West Texas Intermediate Crude oil slipped to $47.20 a barrel from $48.20 last week.


Lack of inflation has central banks rethinking
In recent months markets have been anticipating that the European Central Bank will join the US Federal Reserve in beginning a long process of monetary policy normalization. However, in minutes of recent policy discussions, both the Fed and the ECB sent more dovish signals than the markets were expecting. Some policymakers were concerned that inflation is not moving toward the central banks’ 2% targets despite recent upticks in economic growth. These concerns call into question the pace of future Fed hikes and the timing of an expected taper in ECB asset purchases. The FOMC minutes show that members were split, with some calling for caution on further rate hikes while others expressed concern that delaying tightening measures might fuel financial instability. The tone of the ECB minutes has lowered expectations that Mario Draghi will use next week’s speech at an annual Fed symposium in Jackson Hole, Wyoming, to set the stage for a shift toward a less accommodative monetary policy. Any discussion on that matter will now wait until fall.

Trump disbands CEO councils
After several high-profile defections of corporate CEOs from two business advisory councils, President Trump this week dissolved the councils. Friction between the business leaders and the president came to a head in the wake of a Trump press conference on Tuesday in which the president blamed both sides for violence at a rally in Charlottesville, Virginia last weekend rather than single out racist hate groups.

North Korea backs off Guam threat
North Korea regime announced this week that it will not target the area around Guam, a US island territory in the Pacific Ocean, quelling fears that its recent standoff with the US could lead to war. This week, China implemented United Nations sanctions, cutting off imports of North Korean coal, iron ore and seafood, further isolating the country and depriving it of hard currency that it often uses to bolster its nuclear program.

US investigating China trade
President Trump signed an order this week directing the Office of the United States Trade Representative to conduct an investigation into China’s trade practices with regard to intellectual property theft and the forced transfer of technology in order to be granted access to Chinese markets. If China is found to be in violation, Trump can skirt the World Trade Organization and order tariffs under the Trade Act of 1974. Meanwhile, NAFTA negotiations are set to begin this week between the United States, Canada and Mexico. US Trade Representative Robert Lighthizer said the US is not looking for mere tweaks in the existing treaty, but substantial changes that assure balance and reciprocity.

UK publishes Brexit positions
After being criticized by European Union negotiators for months, the British government published several position papers this week, laying out detailed viewpoints on border issues between Northern Ireland and the Republic of Ireland as well as on the need for a transitional customs union following Brexit. British negotiators are trying to meet the EU demand that sufficient progress be made on a series of issues, including the Irish border, the rights of EU citizens living in the United Kingdom and the financial settlement, before negotiations on future relations between the UK and EU are taken up.

Japan’s economy kicks into gear
Fueled by increases in consumption and capital expenditures, Japan’s economy expanded at a 4% annualized rate in the second quarter, far exceeding expectations of a 2.5% rise. The economy grew for a sixth straight quarter, while inflation, though mild, ticked up for a sixth month in June. The current robust pace is not expected to be sustained as economists forecast a slower pace of economic growth for the balance of the year amid lackluster wage gains.


With 92% of the members of the S&P 500 Index reporting, Q2 earnings are expected to increase 12% compared with Q2 2016. Excluding the energy sector, earnings are expected to advance 9.3%. Revenues are seen growing 5.1% overall and 4.2% when excluding energy companies.





Tue, 22 Aug


Economic sentiment survey

Tue, 22 Aug


Retail sales

Wed, 23 Aug


Preliminary purchasing managers’ indices

Wed, 23 Aug

United States

New home sales

Thu, 24 Aug


Jackson Hole Fed symposium begins

Fri, 25 Aug


Durable goods orders

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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