Drivers for the Week Ahead - BBH

Research Team at BBH note that the dollar is broadly weaker against the majors. The yen and sterling are outperforming, while the Antipodeans are outperforming. EM currencies are mostly firmer. MXN and ZAR are outperforming, while TRY and INR are underperforming. MSCI Asia Pacific was up 0.2%, even with the Nikkei falling 1.3%. MSCI EM is up 0.6%, with China markets rising 0.3%. Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 2.46%. Commodity prices are mixed, with WTI oil down 1.5%, copper up 0.6%, and gold up 0.3%.

They further write, "The developments over the last few days, including the strident tones of the inauguration speech, may be a small hint to investors of the unpredictable nature of the new US President. The unorthodox style and rhetoric should not distract from the necessary focus on policy. Ultimately, public policies and private sector behavior, not speeches or wishes, drive interest rates, equities, and currencies."  

Key Quotes

"The priority appears to be to re-negotiate NAFTA. Few people are opposed to reviewing old agreements. No doubt it can be updated; it is 23 years old. Intellectual property rights have evolved, the Internet not only exists but is an important distribution channel for goods, services, and information, there are new tax and accounting rules, and the like. While modernizing old agreement is one thing, changing the essential thrust (reduced barriers to trade in the North American continent) is quite a different thing. It is not clear to many whether Trump's rhetoric is part of the "Art of the Deal," or whether it is a principled position."  

"Like his predecessors, Trump also talks about enforcing existing agreements. Sometimes there have been trade disputes among NAFTA countries. That is an important thing that is often overlooked about trade agreements. They provide a conflict resolution mechanism, invaluable for resolving and containing disputes. It is like a penalty in a football game or a foul in basketball. The violation of the rules is incorporated into the rules themselves."  

"Remember too, the desire to negotiate NAFTA (by Bush-the-elder, and approved under Clinton) was partly a reflection of the significance of north-south trade. In effect, the agreement codified and furthered trends already in place, as well as a means to address infractions. The agreement followed trade just as much as more trade followed the agreement."  

"Second, the White House says it wants the US to create 2.5 mln new jobs over the next decade. Over the last five years, the US created an average of 197k net new jobs a month. The five-year monthly average has rarely been over a 200k. Although during the campaign there was talking of achieving 5%-6% growth, the White House now says 4%, while Mnuchin said 3%-4% in his confirmation hearings."  

"The US economy grew 3.5% in Q3, and the first estimate of Q4 will be reported on January 27. The NY Fed's GDP tracker sees growth at 2.4% quarterly annualized rate (2.7% for Q1 17). The median in the Bloomberg poll is 2.2%, while the Atlanta Fed GDPNow estimate is 2.8% for Q4."

Peaceful Transition of Power, Now Get on with it!