- Today’s Trump-Abe meeting will be watched for more for tone than content
- Early-Feb U.S. consumer sentiment index expected to fade
- Import prices expected to move higher
- Yellen likely to remain noncommittal in next week’s Congressional testimony
Today’s Trump-Abe meeting will be watched for more for tone than content — The markets already have a good idea about the topics of discussion at today’s summit meeting in Washington between President Trump and Japanese Prime Minister Abe. Mr. Abe will be (1) highlighting the contributions that Japan already makes to the U.S. economy by manufacturing goods in the U.S., (2) offering new opportunities on investment, jobs, and infrastructure, and (3) stressing the importance of military defense. Mr. Trump will be reiterating his charges that Japan is taking advantage of the U.S. through trade and a weak currency.
Mr. Abe will be trying to fend off Trump administration charges of an undervalued yen by arguing that the BOJ’s extraordinarily easy monetary policy is aimed not at FX but at battling deflation. Mr. Trump two weeks ago said that China and Japan are playing the “devaluation market” and we sit here “like a bunch of dummies.”
Japan’s easy monetary policy does have the collateral effect of causing a weak currency, but the Japanese economy is still not in good enough shape to end QE and start raising interest rates in order to support the yen and satisfy the Trump administration. So Mr. Abe will have to simply plead for patience on the yen while in the meantime offering to engage with the Trump administration on other key issues such as trade, jobs and defense.
In any case, the tone of today’s meeting will be more important than its content. If Mr. Abe can get through a successful meeting with Mr. Trump with no new outbursts or negative tweets, that would be a win for the markets. Other world leaders could then go to school on how Mr. Abe deals with Mr. Trump. The Trump administration also needs a smooth meeting with Mr. Abe to help dampen concerns about the administration’s rocky start.
The yen could see some knee-jerk reactions out of today’s Trump-Abe meeting. However, we do not look for any big currency move to come out of today’s meeting since the meeting will have no implications for monetary policy. Both the Fed and the BOJ have their near-term plans set and interest rate differentials will continue to be the main driver for the dollar/yen over the near-term. With BOJ policy fixed at present on a massive QE program and near-zero bond yield target, the main variable for the dollar/yen is when the Fed will implement its next rate hike.
Early-Feb U.S. consumer sentiment index expected to fade — The market is expecting today’s preliminary-Feb University of Michigan U.S. consumer sentiment index to show a -0.6 point decline to 97.9 from January’s 13-year high of 98.5. The index rose sharply by +11.0 points in Nov-Dec after the November election sparked hopes for a stronger economy and tax cuts.
However, consumers turned more cautious in January with the sentiment index rising by only +0.3 points. Consumers in February may now have reached the “show-me” stage where they will wait for tangible results out of Washington before they get their hopes up any farther.
Import prices expected to move higher — The market is expecting today’s Jan import price index to show a moderate increase of +0.3%, adding to Dec’s +0.4% increase. Import prices on a year-on-year basis are expected to jump to +3.3% y/y from Dec’s +1.8%, partially because of a weak year-earlier comparison when oil prices in early 2016 were at the trough of their 1-1/2 year-long plunge. Still, today’s expected +3.3% y/y rise in Jan import prices would be the largest increase in nearly five years and will put some upward pressure on the broader CPI and PCE deflation inflation statistics.
Excluding oil, import prices are much more subdued and were unchanged y/y in December. Still, that was the strongest report in two years and illustrated some upward pressure even on non-oil import prices. However, the markets are not particularly worried about the import price picture because the general dollar strength should curb import prices in coming months.
Yellen likely to remain noncommittal in next week’s Congressional testimony — Fed Chair Yellen next week will deliver her semi-annual testimony on monetary policy to House and Senate committees. There is some talk that Ms. Yellen next week might step up her hawkish language and effectively say that the March 14-15 FOMC meeting is “live” for a rate hike decision, just as Philadelphia Fed President Patrick Harper did earlier this week.
However, we look for Ms. Yellen to remain noncommittal about the timing of the Fed’s next rate hike, particularly since there is no point in saying something that is gratuitously bullish for the dollar and risk antagonizing President Trump. The Fed at present is best advised to lay low and wait to see what happens next in Washington. The Republican fiscal agenda has been very slow to emerge and March will be too soon in our view for the Fed to take any preemptive action with a rate hike.
The latest set of Fed dots released in December indicated that the Fed expects to raise interest rates three times this year. On that schedule, the Fed would need to get going with a rate hike at either the March or May meetings, the second rate hike for July/September and the third for perhaps for December. However, the market is looking for only two rate hikes in 2017, the first by either May/June and the second by November/December. The market is discounting a 30% chance of a rate hike at the next FOMC meeting on March 14-15, an 80% chance of a rate hike at the May 2-3 meeting, and a 100% chance of a rate hike by June.