November 20 2016

Nov. 20, 2016 (Commerzbank AG) – Trumpflation – are the markets right?

Following Donald Trump’s election triumph, share prices, the dollar and even market-traded inflation expectations rose sharply. But are the markets right to take such a view? At our monthly forecast meeting, we merely made a cosmetic adjustment to our US picture. Core inflation can be expected to continue rising moderately – though more on account of near-full employment, and less on account of Trump. In the euro zone, with its high level of unemployment, core inflation seems set to hold at only 1%. In early December, the ECB will no doubt extend its bond purchase programme, and the expected resultant shortage of bonds will force it to raise the prospect of tapering purchases by mid-2017.

Outlook for the week of 21 to 25 November 2016

  • Economic data: In the euro zone, important sentiment indicators have recently signaled a somewhat higher growth rate for the final quarter of 2016. This view will come under further scrutiny next week with the release of PMI and German Ifo data.
  • Bond market: The situation remains tense on global bond markets. As investors are likely to remain nervous we expect heightened volatility, with the risk of further widening spreads and Bunds to benefit from rising risk aversion.
  • FX market: Higher inflation expectations after the US presidential election are fanning expectations of a Fed rate hiking cycle. This is lending support to the US dollar which could become a self-reinforcing process. We expect more rapid USD appreciation.
  • Equity market: The German Q3 reporting season was broadly in line with expectations, and with fewer analysts likely to revise down their earnings estimates, this is helping the market to stabilise.
  • Commodity market: Oil prices are likely to tread water until the OPEC meeting at the end of this month, with hopes of production cuts offsetting news about excess supply. Base metals markets are likely to continue correcting downwards, although gold should benefit from rising Asian buying interest.