Global daily insight 25 november 2016

Daily Insight

Group Economics Macro & Financial Markets Research

25 November 2016

New US, China and PM outlook Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

US Outlook: Trump’s policies to boost economy, but not without risks - We expect fiscal stimulus to boost growth in an economy nearing full employment. We expect stimulus to be less than what the President-elect has promised, but it will still likely be large. Still, there is uncertainty around the timing and impact of this stimulus. This is partly because the private sector is expected to play a major role in fulfilling these policies through more investment and consumption. Mr Trump’s anti-globalisation plans were a major priority in his presidential campaign. We think trade policy will remain a key issue, but we expect he will take a more nuanced stance. The President-elect has already announced that in his first day in the White House he will withdraw from the Trans-Pacific Partnership (TPP) and that instead he will seek bilateral trade agreements. We expect moderate protectionist policies rather than full blown trade war. There are some downside risks to our base scenario, resulting from the uncertainty regarding protectionist and immigration measures, given that we do not assume that these policies will be a major drag on growth. There are also fears that the President-elect’s policies will stimulate inflation to levels that will force the Fed to raise rates more aggressively. This together with increasing uncertainty could lead to a stagflation scenario. For more, please see US Outlook – Q&A on the impact of Trump’s policies (Maritza Cabezas) US Macro: Economy doing well even before stimulus - The most recent batch of economic data corroborates the view that the US economy was on firmer footing even before the likely Trump fiscal stimulus. To begin with, forward looking sentiment indicators, including consumer confidence have improved. The University of Michigan’s index of consumer sentiment moved modestly higher to 93.8 in November. The forward looking index of consumer expectations, increased to 85.2 from 76.8. The upward trend in consumer expectations supports our assumption that in the coming time consumer demand will remain robust. This is likely to find more support if President-elect Trump’s income tax cuts become effective. Moreover, the tide seems to be finally turning for business investment. October’s core capital durable goods orders (ex-defence and ex-aircraft), which is a proxy for business investment, rose by a solid 0.4% mom from -1.4% the previous month. We are anticipating a modest increase in investment in equipment in the coming months, as oil prices recover and manufacturing activity picks up. The positive data seem to be a sign that the trend is turning up after a long period of subdued manufacturing activity.

Finally, recently released housing data continue to show a steady improvement, particularly existing home sales were much stronger than expected in October. This all shows that the pieces are falling into place and that the in the fourth quarter GDP growth will be comfortably above 2%. A Fed rate hike in December looks increasingly like a done deal.

(Maritza Cabezas) China Outlook – China’s soft landing to continue in 2017-2018 - We expect China’s very gradual slowdown to continue, with growth falling from 6.9% in 2015 to 6.7% in 2016, 6.5% in 2017 and 6.0% in 2018. We raised our 2017 growth forecast from 6 to 6.5% for the following reasons: 1) economic growth has stabilised at 6.7% so far this year, partly thanks to (fiscal) stimulus, 2) 2017 is a politically important year, given expected rotations in the

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Daily Insight - New US, China and PM outlook - 25 November 2016

Politburo Standing Committee and 3) our base scenario for the US is a ‘moderate Trump’ scenario. Still, Trump’s presidency raises external risks for China (capital outflows, FX pressures, uncertainty regarding foreign trade and investment). This adds to an already impressive list of macrofinancial risks (high debt, overcapacity, bad loans, weak private investment, capital flows and geopolitical issues), some of which are rising as Beijing is kicking some cans down the road. All in all, while economic growth has steadied and we do not foresee a hard landing in our two year horizon, China’s transition will remain bumpy.

Hence, we should not be surprised if financial markets in 2017-18 may be spooked from time to time by developments in China and by twists in the US-China relationship. For more, please see China Outlook – Soft landing to continue in 2017-2018 (Arjen van Dijkhuizen) Precious Metals Outlook: Trumpflation to weigh further on gold prices - We expect the current negative environment for gold prices to remain in place in 2017. Investor demand remains the most crucial driver pushing gold prices lower. From an investor point of view there is little reason to hold gold as an investment. For a start, rising inflation expectations are more than countered by the rise in US Treasury yields and expectations about upcoming rate hikes by the Fed. As a result, US real yields are rising which is a major negative for gold prices. Moreover, higher inflation expectations have not triggered major inflation fear. As long as real yields rise and there are no major inflation fears, gold prices will likely drop. What is more, the last leg of a powerful rally in the US dollar is in full swing.

Investors will find zero-income paying asset gold and other precious metals unattractive because of higher income in equities and bonds, with the exception of palladium, which has a strong cyclical exposure. We expect that gold prices will drop towards USD 1,100 (above the low set in 2015). Lower gold prices will likely stimulate jewellery demand and industrial demand. We expect jewellery demand and industrial demand to rise at a modest pace. This will not compensate for lower investor demand but merely dampen the size of the move down. For more, also on the outlook for other precious metals, see Precious Metals Outlook – Gold hit by Trump reflation (Georgette Boele)

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Daily Insight - New US, China and PM outlook - 25 November 2016