Fed likely to keep rates steady as it awaits Trump economic plan

Reuters: The US Federal Reserve is expected to keep interest rates unchanged on Wednesday in its first policy decision since President Donald Trump took office, as the central bank awaits greater clarity on his economic policies.

Trump has promised a large infrastructure spending program, tax cuts, a rollback of regulations and a renegotiation of trade deals but has offered few details or a timeline for their rollout since his victory in the Nov. 8 election.

The central bank’s latest policy decision is scheduled to be released at 2 p.m. EST (1900 GMT) on Wednesday at the conclusion of a two-day meeting. Fed Chair Janet Yellen is not due to hold a press conference.

The policy decision will come a week after Yellen underscored that the U.S. economy is near full employment and warned of a “nasty surprise” on inflation if the Fed is too slow with its rate hikes.

Economists polled by Reuters have all but ruled out a rate increase at this week’s meeting. Investors next see an interest rate rise in June, according to Fed futures data compiled by the CME Group.

The Fed raised its benchmark interest rate at its last policy meeting in December, the second such move in a decade, to a target range between 0.50% and 0.75%. It forecast a further three rate increases this year.

Wait-and-see mode

Despite encouraging U.S. economic data, Fed policymakers are currently hampered in assessing how quickly inflation might rise until they have more information on Trump’s economic plans.

“At the moment there’s incredible uncertainty surrounding fiscal policy and the potential for stimulus and the composition of that,” said Paul Ashworth, an economist at Capital Economics. “The Fed can’t react until it knows what to react to.”

With the U.S. economy already bumping up against full employment, Trump’s promises on fiscal stimulus and tax reform could quickly spur higher inflation as would imposing tariffs on Mexican imports.

That may cause Fed policymakers to raise rates faster.

Other policies, such as an immigration crackdown, go against what the Fed argues the U.S. economy needs to grow over the long term.

U.S. stocks fell on Monday after Trump curtailed travel and immigration to the United States from seven predominantly Muslim countries.

The S&P 500 index is still up roughly 6% since Trump’s victory and the robustness of the domestic economy makes the United States increasingly divergent from Japan, the euro zone and Britain, none of which are expected to raise rates anytime soon.

The Fed will likely only make minor tweaks in its policy statement on Wednesday to reflect a string of positive recent economic reports.

“Changes to the ... statement should be mostly upbeat,” Roberto Perli, an economist at Cornerstone Macro LLC, said in a note to clients.

The U.S. unemployment rate is 4.7% and business investment has improved, despite a slowdown in fourth-quarter economic growth caused mostly by a widening trade deficit. Consumer spending, which accounts for more than two-thirds of the nation’s economic activity, rose solidly in December, according to Commerce Department data released on Monday.

In the same report, the Fed’s closely-watched inflation gauge also edged up to 1.7%.

Asian shares rattled by Trump policy worries, dollar soft

Reuters: Asian shares slipped on Tuesday as stringent curbs on travel to the United States ordered by President Donald Trump brought home to investors that he is serious about carrying out his controversial campaign pledges.

Global stocks posted their biggest loss in six weeks on Monday after Trump signed an executive order to bar Syrian refugees indefinitely and suspend travel to the United States from seven Muslim-majority countries, sparking widespread protests.

European bourse are expected to remain fragile after big losses on Monday, with spread-betters seeing opening losses of as much as 0.1% in major indexes, including Britain’s FTSE, Germany’s DAX and France’s CAC.

“Investors are becoming worried as it appears as if he was setting fire to geopolitical risks that already exist,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.

Trump’s move drew criticism from some U.S. policymakers, and business leaders, with technology companies, which depend on talent from around the world, planning to discuss a legal challenge.

“His stance is really inward-looking, making investors nervous about his ‘moderateness’,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5% while Japan’s Nikkei .N225 dropped 1.7%, its biggest fall in almost three months.

On Monday, the US S&P 500 Index fell 0.6%, its biggest fall in a month, though it remained well above levels seen before the Nov. 8 presidential election.

MSCI’s gauge of the world’s 46 stock markets shed 0.6%, its largest loss in a month and a half.

The mood soured further when Trump fired the federal government’s top lawyer after she took the extraordinarily rare step of defying the White House.

U.S. stock futures shed 0.3% on Tuesday and the dollar extended losses against the yen.

Still, most share prices were up on the month, supported by signs of accelerating momentum in the global economy and hopes of large fiscal stimulus from Trump.

MSCI’s ex-Japan Asian shares index was up 5.7% this month while its index of world markets was up 2.5%. They were also higher than their levels before the U.S. elections.

In the currency market, the dollar was broadly weak and fell 0.3% against the yen to 113.49 yen. It was down 3.1% so far this month, after three straight months of sizable gains.

The Japanese currency showed no reaction after the Bank of Japan kept its policy on hold, as expected. A string of recent data has suggested the economy is slowly regaining traction.

The euro edged up to $1.0710, consolidating after its rebound this month from its 14-year low of $1.0340 set on Jan. 3.

In a possible sign of increased anxiety among investors, the safe-haven Swiss franc strengthened to a seven-month high of 1.0637 franc per euro on Monday.

Worries are also growing about a political shift to populist leaders in Europe.

French bond yields rose to the highest level since September 2015, on rising uncertainty over the Presidential election later this year.

Conservative leader Francois Fillon, seen as the front-runner, is now battling to contain a scandal over allegedly unlawful payments to his wife while the Socialists on Sunday picked a hard-left candidate, possibly helping popular far-right leader Marine Le Pen.

Italian debt yields climbed to 1 1/2-year highs partly as early elections could be called following a ruling from the country’s constitutional court last week.

Italian assets have also been hit by worries over its banking sector after UniCredit, the country’s biggest bank, revealed on Monday it expects to book a net loss of around 11.8 billion euros ($12.6 billion) for 2016 and fall short of European Central Bank capital requirements.

By contrast, the yield on German debt fell on Monday even as data showed inflation in Germany hit a 3 1/2-year high in January.

News that Germany posted a national inflation rate of 1.9% stoked talk of an unwinding of monetary stimulus by the ECB, even though the inflation outcome was below expectations.

Elevated uncertainty about Trump’s policies, including a lack of detail so far on his plans for tax cuts and fiscal spending, offset optimism on the U.S. economy.

Data on Monday showed U.S. consumer spending accelerated in December while inflation showed some signs of picking up last month.

The core PCE price index, the Federal Reserve’s preferred inflation measure, rose 1.7% on a year-on-year basis after a similar gain in November.

“We’ve seen a jump in U.S. economic sentiment after Trump’s victory. But the improvement in hard economic data remains moderate,” said Haruka Kazama, senior economist at Mizuho Research Institute.

“And if Trump takes more steps to limit permits for immigrants, that would surely boost inflation as the U.S. is now near a full employment,” she added.

The Federal Reserve, which will start its two-day policy meeting on Tuesday, is widely expected to keep interest rates unchanged as it awaits greater clarity on Trump’s economic policies.

Oil prices dipped as rising U.S. drilling activity offset efforts by OPEC and other producers to cut output in a move to prop up the market.

Brent crude futures, the international benchmark for oil prices, were trading at $55.14 per barrel, down 0.2% from Monday’s settlement price.