The market moves around the turn of the year reflected a curious decline on the dollar, in spite of the general perception of the economic benefits that will come through the legislation of Republican tax reform. It seems that the concern over inflation is key for financial markets and perceptions of inflation could make or break the US dollar in 2018, with an early indication of movement being taken with the US CPI this week. We look at the technical outlook of forex, equities and commodities markets.
The US labour market remains strong, with solid job creation and unemployment around 4%. The Republicans tax reform will apparently lead to hundreds of large corporations such as AT&T (NYSE:T), Bank of America (NYSE:BAC) and American Airlines (NASDAQ:AAL) offering bonuses, wage hikes and capital expenditure. Lower corporate tax rates will give all companies more room to benefit their workers.
Could we about to see the Phillips Curve really kicking inflation higher once more? With a link between wage growth and inflation, this could be a theme of 2018. Is inflation finally ready to pick up this year and repay the Fed’s faith in its tightening cycle? If so then markets will need to start repricing inflation expectations and this would be seen in longer dated yields pulling higher.
Will the US 10 year yield start to climb back towards 3% again? However, one off bonuses may not cut it, whilst labour market dynamics could also play a part. Participation rate has been falling since 2007/2008 but seems to be showing signs of picking up. A sustained increase in participation increases the supply of labour which could hamper wage growth and subsequently inflation. Furthermore, the relative strength of the dollar could also be limited as the global economic recovery gathers pace, with inflation around the world starting to show signs of gradually picking up. If this puts central banks like the ECB or BoJ on a more hawkish path then any dollar recovery could be a damp squib. 2018 will be very interesting.
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