We are two months into 2017 and economic data continue to signal good momentum in advanced economies much to the relief of forecasters following years of “serial disappointment”. Europe in particular is seeing its share of upside surprises. Economic sentiment in the euro area remains at cycle highs and purchasing managers’ index readings broke above recent ranges in February. Somewhat unexpectedly, the greatest improvement has been seen in France―despite heightened political risk. While the recent trend in the data is encouraging, we remain wary that uncertainty surrounding a number of elections could dampen economic activity. UK data have remained strong early in the year after the economy dramatically outperformed expectations in H2/16 post-referendum. Indicators have been a bit more balanced in Canada, growth and employment numbers have been strong but underlying details (weak in- vestment and flat non-energy exports) continue to highlight challenges facing the economy. The Bank of Canada remains cautious given risks posed by potential changes in US policy.
A strong US outlook, with upside surprises on employment and inflation, seems to have shifted the Fed toward a ‘sooner than later’ mentality on monetary policy comments from a number of Committee members point to a March rate hike. Markets took that shift in stride, with US Treasury yields remaining within recent ranges while equity markets continued to rally (to record highs for the S&P 500 and MSCI World Index on March 1) despite the expectations of tighter monetary policy. The prospect of fiscal stimulus in the US continues to buoy stocks even as details remain sparse and challenges for the passage of policy changes rise, while investors seemingly dismiss downside risks from protectionist trade policies.
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