Central Banks Retain Centre-Stage

Daily Analysis - 05/11/2017

Republican Legislators Debut Proposed US Tax Bill

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The spotlight last week was on central bank decisions from across the globe combined with the lead-up to new Federal Reserve Chair’s appointment alongside details on US tax reform. Global equities set record highs again during the week, with the benchmark S&P 500 extending its string of weekly gains to eight, marking its best run in four years.

Last Week


Market momentum was dominated by the decisions of central banks last week, starting with the Bank of Japan announcing no change in policy.  The fireworks arrived when the Bank of England voted 7-2 to raise the base rate by 0.25% to 0.50% - its first hike since 2007. While the rate increase was anticipated, the dovishness of subsequent statements took investors by surprise, hammering the Pound as hopes of further tightening dwindled. The Federal Reserve also decided to stay put, instead focusing on the upbeat economy and fleeting effect of the hurricanes. The impact on markets was negligible as investors focused on who might replace Janet Yellen at the Central Bank’s helm.

Thursday, President Donald Trump nominated Jerome Powell as the next Federal Reserve Board Chair. If confirmed, Powell is anticipated to maintain policy continuity while rolling back some post-crisis banking reforms. In addition, the US tax reform package was presented to the House of Representatives, calling immediately for the corporate tax rate to be cut to 20.00% in a plan that also incorporates a one-time tax on profits repatriated by US multinationals. The October jobs report closed out the week with the US economy reporting a lower-than-forecast new 261,000 jobs last month. Apart from central banking announcements, preliminary GDP data from across the Atlantic indicated the Euro Area grew at an annualised 2.50% pace through the third quarter.

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The Week Ahead


The central bank theme will continue for a third straight week, as investor attention shifts to the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ). On the economic data front, trade and industrial output figures from China, Germany and the UK, as well as Chinese inflation figures should grab the headlines. The RBA is almost certain to leave its cash rate at 1.50% on Tuesday after inflation unexpectedly dropped in the third quarter and retail sales witnessed their weakest quarter since 2010. In neighbouring New Zealand, the RBNZ will hold its policy meet amid market jitters about the new Labour government’s economic agenda.

Despite the change in regime, there is unlikely to be a major shift in monetary stance, with the Central Bank expected to keep its cash rate steady at 1.75%. Chinese trade figures due Thursday will be closely watched for fresh signs of a slowdown in exports. Producer and consumer price numbers will follow on Thursday, with producer price inflation projected to surge 6.90% year-on-year in September. After hitting a record high in August, the UK trade deficit is forecast to marginally narrow in September. Finally, US earnings season will continue winding down with 48 of the S&P 500 companies reporting quarterly results throughout the week. Economic news will be slower with Friday’s University of Michigan Consumer Sentiment Index being the most notable report.

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