Tags: trump | economy | inflation | politics

Hans Parisis: Investors Cling to Sense of Normalcy in Increasingly Abnormal World

Hans Parisis: Investors Cling to Sense of Normalcy in Increasingly Abnormal World

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Tuesday, 13 December 2016 07:40 AM Current | Bio | Archive

The imminent Fed’s FOMC decision, forecasts and comments will hold markets in its thrall until tomorrow. Not because the decision itself is likely to create any surprises, but because the nuances and forecasts are something that markets will want to obsess over and of course assess.

To some extent, perhaps, this is an example of investors clinging desperately to any sense of normality in an increasingly abnormal world.

There is perhaps a certain futility in placing so much emphasis on the Fed’s nuances and forecasts when there are two vacancies at the FOMC at the moment, and the independence of the Fed has being questioned in Congress.

Nonetheless in these uncertain times the reassurance of debating Fed policy as if nothing else was changing offers a certain comfort.

The debate about monetary policy next year, in the U.S. and elsewhere, has to take into account the outlook for inflation.

We should not forget that inflation never really went away. The drop in the global oil price was not disinflationary and excluding that, inflation pressures were building in several economies.

With oil base effects visibly raising headline inflation rates, the reality of inflation is being forced before investors.

Today, we’ll also get final consumer price inflation data from several Euro area economies and from the UK.

It’s not especially market moving on itself beyond the fact that inflation will now start to assume greater prominence.

One data set that might be worth a second glance is that of the UK. The UK has been bucking the global trend. In the UK, inflation has been surprising by being less significant than expected. This is because the weakness of sterling has shown up in producer price inflation (PPI) that has not yet translated into consumer price inflation (CPI). Oil base effects and labor market pressures do show up in the inflation numbers, as they do elsewhere, but sterling’s weakness has not.

Chinese economic data showed further gains in retail sales, almost 11 percent on the year, with industrial production growing in line with expectations as well.

This pattern of growth does emphasize the determination of China’s government to achieve its growth objectives. A determination that should occasion no surprise to anyone.

However, and this could be helpful to investors for keeping in mind, it is also worth noting that China has an inward looking sort of growth. China is not becoming more integrated into the global economy with this domestic consumer focus.

That means that attempts to read Chinese retail sales as a relevant indicator for economic activity in the rest of the world are doomed to failure.

China may by the world’s second largest economy, but that just gives it a large weight in the global growth aggregate. It doesn’t tell us anything about contributions to growth elsewhere. The Soviet Union used to be the world’s second largest economy, but that was not integrated. So, that didn’t matter much either.

Aside from the economic numbers there is the normal round of politics to consider.

Senior Republicans in the United States have broken with Trump over investigating Russian involvement in the U.S. elections.

This may matter as there has been some criticism of Trump’s supposed nominee of Secretary of State, which is a role that requires Senate confirmation.

Meanwhile the U.S. China tensions have not diminished with the “One China policy” occupying regional media attention, and China, separately, launching a legal challenge to the U.S. and the EU to trying gain “market economy status”  at the World Trade Organization - WTO.

Finally and looking forward, I think, maybe, 2017 could be the politics and inflation year…

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Investors are clinging desperately to any sense of normalcy in an increasingly abnormal world.
trump, economy, inflation, politics
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2016-40-13
Tuesday, 13 December 2016 07:40 AM
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