Good morning,
It is rare that predictions of ours are proved correct in such a short amount of time but our thoughts that 2017 would be dominated by Trump on trade and investment, inflation and Brexit negotiations were proved correct by a microcosm of a day yesterday.
Ford dances to the Trump tune
The Presidency of Donald Trump does not begin for another fortnight or so and reactions have been a part of life ever since we saw the Electoral College turn red on that November night but the decision by Ford to cancel an investment of $1.6bn in Mexico for a $700m investment in Michigan is a big win. The move comes after a tweet from President Trump earlier in the day that cars made by General Motors in Mexico but sold tax-free in the US should be subject to a 10% border duty.
The North American Free Trade Agreement (NAFTA) allows a car to be built in either the US, Canada or Mexico and as long as 65% of it is manufactured in that bloc then taxes are not paid; Trump wants to end this and it seems like Ford is listening .
This may allow Trump to soften his stance on further tariffs on Mexican products however we would expect that other industries that have been hurt by lower marginal costs in Mexico – textiles, lumber and agriculture – may want their day of victory as well.
Inflation already starting to jump
Of course, one of the side effects of a protectionist trade policy that drags jobs from a cheaper area to a more expensive one is an increase in inflation and we expect that the cost of a Ford Focus or F-150 pickup truck will increase as wages become a higher proportion of the manufacturing cost.
In Europe at 10am however the discussion is more about oil and prices in energy markets boosting inflation. CPI in the Eurozone, the main headline level of price increases in the bloc, should show a rise of around 1% in December. The majority of this increase originates from the pickup from multi-year oil price lows this time last year but conversations will naturally turn therefore to an end to stimulative policy from the European Central Bank.
We think this is misguided.
Core prices that look through volatile food and inflation measures are unlikely to be close to the 2% target set by the European Central Bank for a while and this should preclude a continuation of the QE plan past the March deadline. This will not stop more vocal members of the ECB – here’s looking at you Bundesbank – from expressing dismay at a potential run higher in inflation.
The euro spent a lot of yesterday on the back foot with the lows only a little over 3% away from parity with the US dollar.
Brexit envoy quits and attacks ‘muddled thinking’
The news that Sir Ivan Rogers has decided to leave his post as the UK Ambassador to the EU is a classic exercise in echo chambers. On the one side Remainers are sat lauding his bravery in standing up for what he believes in whilst Leavers see him as a coward, unwilling to perform his patriotic duty.
For most however, it symbolises a lack of planning and negotiations that are verging on the dysfunctional. We await to see who the May government appoint in Sir Ivan’s stead but it is a nailed on certainty that the person will be a Brexiteer.
Sterling was unmoved on the news and has started the year in a quiet fashion. Yesterday’s manufacturing number allowed for some positivity as output and orders both rose, as did input prices courtesy of commodities and the fall in sterling.
The day ahead
Focus will fall on the Eurozone inflation numbers today but tonight’s Federal Reserve minutes from the December meeting that saw interest rates rise for the first time in 12 months. Questions will remain on how much discussion was had on the possible effects of Trumpian fiscal spending and the outlook for the inflation.
The minutes are due at 19.00 tonight.
Have a great day.