In the US, the “Trump” effect is fading as the new president finds difficulties to pass measures at the Congress The economy is doing well anyway, boosted by external demand and higher oil prices (pick-up in shale oil activities) This could have a rather inflationary impact since the economy is already close to its potential, and unemployment is very low. We expect inflation to edge up, rising above the official target of 2%, due not only to higher oil prices but also to wage pressures. In this case, the Fed would probably speed-up the process of raising key rates, and the bond market is likely to underperform.
The Euro area recovery appears to be self-sustaining and is resisting potential headwinds (Brexit, “Trump tantrum”). Intra-EU trade continues to build, signalling stronger domestic demand. The ECB’s “QE” and zero interest rate policy continues to revive credit and money supply growth. Inflation has rebounded in the wake of higher oil prices, but the core CPI trend remains very subdued, which argues for the ECB to maintain the status quo in 2017.
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