The major US equity indices reached record highs before the weekend even if the Dow 20000 level was just out of reach. Following news of a stronger than expected rise in hourly earnings, US yields rose, and after an initial stumble, the dollar recovered on closed on its highs.
The underlying narrative that explains and justifies these broad trends stands on four legs. First, that the US economy is expanding at a sufficient clip to spur some price pressures, including, as we saw in the employment report, hourly earnings. (2.9% year-over-year, a new cyclical high, though below past recoveries and expansion levels). Second, that the economic policies of the new Administration will be pro-growth in the form of de-regulation, tax changes, and nationalist economic policies. Third, that other high income countries are expanding at least near-trend, and price pressures appear to have bottomed. Fourth, populist-nationalist forces will be featured on the European political stage, posing the last expression of the existential threat.
The headwinds on the US economy abated in the middle of last year. The economy expanded at a 3.5% annualized rate in Q3 16 and, while it likely slowed, with less of a contribution from consumption, and a drag from net exports, recent data prompted upward revisions to the Atlanta Fed GDP tracker to 2.9% for Q4. The Bloomberg consensus is 2.3%, while the NY Fed’s tracker has it at 1.9%. Some economists are suggesting there is better than a one in three chance of a Fed hike in March, while the CME estimates that the Fed funds futures currently discounts about a one in four chance.
The December retail sales data that will be reported on January 13 will give no reason to doubt basic scenario. The headline may be flattered by the better than expected vehicle sales and the increase in gasoline prices. The GDP should rise around 0.3%, consistent with consumption rising at a slightly than the 3.0% pace in Q3.
In Europe, the main feature is November industrial output reports. Industrial output in the UK and eurozone is expected to have risen by 0.5%-0.6%. The main difference is in year-over-year pace. The eurozone’s pace may more than double from the 0.6% clip seen in October. The UK’s industrial output my turn positive (~0.5%) after contracting (-1.1%) in October. Â
