White House still stuck in the mud

Trump’s imbroglio with Preet Bharara and James Comey is certainly eye-catching and will continue to garner headlines but it’s difficult to see the testimonies having far-reaching consequences while the administration is so far from recognising the implications of the debate, let alone acting to stymie the accusations. While this continues and Trump focuses on the media and not passing laws, reforming healthcare or progressing with his manifesto promises, then his end-of-year report will look less than glowing.

Nonetheless, it is right of the President to point out that unemployment is falling, jobs are being created, inflation is at healthy levels and US equities are providing double digit returns. But, as the old adage goes, correlation is not causation. The Federal Reserve (and, to a certain extent, Obama’s term in office) should garner more praise for tackling the crisis of 2008 onwards aggressively, quickly and effectively. A reputation they’ll be looking to carry into this week’s rate-setting meeting.

Yellen’s already primed the market, anything else would be a disappointment

At the close on Friday, the so-called FANG group of US stocks (Facebook, Amazon, Netflix & Google/Alphabet) sunk as much as 3% – a dramatic pullback given the market-beating performance of their shares so far in 2017. The proximity of the move to this week’s FOMC meeting can’t be glazed over. It’s just a few days until the meeting at which markets expect the Federal Reserve to raise rates for the second time this year and are likely to reaffirm their commitment to hiking the federal funds rate once more before the year is out. While such a move should strengthen the dollar, it’s been very well signposted by FOMC members and the dollar’s got the White House to contend with.

Not only will the FOMC be disclosing their latest decision on rates, but we’ll also get the latest round of economic projections. We anticipate these won’t be changed too much but we may see a superficial and transitory move lower in inflation and growth forecasts. As is always the case with these meetings, there’s as much attention on the press conference as there is with the release itself, and Yellen will likely be grilled on the topic of tapering reinvestments as part of their QE programme. The Fed normally keep a lid on these types of these discussions, and there’s little to suggest they’ll do anything different this time, but any clues on this will be jumped on by the markets.

Dollar outlook

The dollar index’s decline from highs seen at the beginning of the year has been pretty unceremonious and runs counter to the hawkish stance being adopted by the Fed. While the losses have been limited to just shy of 5% (nothing compared to the depreciation of the pound), a broader recovery in the greenback will be dependent on the Fed really ramping up their rate hike path in the face of inflationary pressure – something that’s yet to be seen in 2017.