This week, investors are focused on the Federal Reserve’s policy meeting, which began on Tuesday and concludes this evening UK time with an interest-rate decision. Rates currently sit within the range of 3.5-3.75%. While markets broadly expect rates to be left unchanged, traders are increasingly attentive to growing debate over the Fed’s future independence. Concerns have centred on the prospect of Chair Jerome Powell eventually being replaced by a successor appointed by President Trump, who has publicly stated that loyalty is a key quality he values in a Fed chair – raising questions about the future direction of U.S. monetary policy. Such a sentiment will no doubt eventually be put straight by policymakers, however, who consistently maintain that their decisions are wholly data dependent rather than in any way linked to political agendas.
Meanwhile, India and the EU reached an agreement on Tuesday aimed at reducing tariffs on a broad range of goods, with the objective of lowering dependence on the U.S. and cutting duty costs for European companies by an estimated €4 billion. Under the deal, the EU is set to reduce tariffs on nearly 100% of goods imported from India over a seven-year period. Under the new agreement, the likes of duties on EU motor vehicles would be cut to 10% in some instances which will support access to European automakers like Mercedes and Volkswagen. Supporting India’s growth agenda has been a central priority for Prime Minister Narendra Modi, a focus reiterated in his budget announcement on Sunday, which emphasised domestic policy reforms and shielding the economy from external shocks.
Figures released on Tuesday showed that service-sector prices in Japan increased by 2.6% year on year in December, maintaining a steady pace of growth. Analysts view the data as another sign that inflationary pressures are increasingly home-grown rather than driven by higher import costs. Since service prices are closely tied to wages and labour expenses, the figures indicate that companies are passing on the impact of labour shortages and rising pay to customers. Alongside persistently high import costs caused by a weak yen, the data strengthens the case that policymakers may soon need to weigh additional interest-rate increases. Wage dynamics were also in focus on Tuesday, as Japan entered its annual round of pay negotiations.
Still to come this week we have Eurozone consumer sentiment, Tokyo CPI and Japanese retail sales and U.S. PPI.
Nicola Tune, Portfolio Specialist
