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World Week Ahead: Eyes on Trump, Yellen

Monday 9th January 2017

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Investors will eye US Federal Reserve Chair Janet Yellen who’s speaking on Thursday after better-than-expected December jobs data helped spur fresh record highs on Wall Street.

First, US President-elect Donald Trump, who has spurred Wall Street bets of increased spending, lower taxes and looser regulation, is set to hold a press conference on Wednesday. It will be his first news conference since winning the Nov. 8 election.

Last Friday, a Labor Department report showed that US employers added 156,000 jobs in the final month of 2016. While that number was somewhat less than economists had expected, the data also showed wages rose the most in more than seven years, with average hourly wages posting a 2.9 percent annualised increase.

The unemployment rate rose to 4.7 percent, from 4.6 percent the previous month, as more people began looking for work, reflecting increasing optimism in the outlook for the world’s largest economy.

Wall Street climbed, with both the Standard & Poor’s 500 Index and the Nasdaq Composite Index closing at record highs on Friday. The Dow Jones Industrial Average came within a point of 20,000 before paring its gains, closing at 19,963.80.

For the four-day week, the Dow added 1 percent, the S&P 500 Index rose 1.7 percent, and the Nasdaq Composite Index advanced 2.6 percent.

“Trump is likely to set the wheels in motion to loosen fiscal policy once he has taken office later this month at a time when the labour market already appears to be fairly tight,” Capital Economics said in a note. “This is something that investors still appear to be underestimating.”

Several Fed officials including Cleveland Fed President Loretta Mester and Philadelphia Fed’s Patrick Harker said they expected three interest rate increases this year.

“I still think two [hikes] is not an unreasonable expectation," Chicago Fed’s Charles Evans told reporters in Chicago, according to Reuters. Evans added that if the economic data comes in stronger than expected, “three is not going to be implausible.”

Over the weekend Fed Governor Jerome Powell pointed to the fact that long-term low interest rates encourage risk taking, lifting asset valuations to the point of overheating. 

“More recently, with inflation under control, overheating has shown up in the form of financial excess,” Powell told the American Finance Association on Saturday in Chicago, according to prepared remarks. “The current extended period of very low nominal rates calls for a high degree of vigilance against the build-up of risks to the stability of the financial system.”

"Low interest rates have encouraged risk-taking and higher leverage in some sectors and have weighed on profitability in others, but the areas where there are signs of excess are isolated," Powell noted. 

Other Fed officials set to speak in the coming days include Eric Rosengren and Dennis Lockhart, today, as well as Charles Evans, Patrick Harker, and James Bullard on Thursday.

The slew of US economic data slated for release include the labour market conditions index and consumer credit, due today; the NFIB small business optimism index and wholesale trade, due Tuesday; Atlanta Fed business inflation expectations, due Wednesday; weekly jobless claims, import and export prices, due Thursday; the producer price index, retail sales, business inventories, and consumer sentiment, due Friday.

In Europe, the Stoxx 600 Index slipped 0.1 percent on Friday.

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