Week ahead: Fed, Dutch election, Trump budget

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It’s all about Wednesday.

The pace of US monetary tightening and the results of the Dutch elections are likely to monopolise investors’ attention next week.

Here’s what to watch in the coming days.

Dutch elections

Dutch voters go to the polls on Wednesday kicking off a busy electoral period in Europe. Incumbent centre-right prime minister Mark Rutte and his People’s Party for Freedom and Democracy (VVD) and Geert Wilders’ right-wing populist People’s Freedom Party (PVV) are considered the frontrunners headed into the election that has 28 parties on the ballot.

Mr Wilders’ calls for a referendum on EU membership had been the primary cause of concern over the past year for investors.

“The focus will be on how the populist-right wing People’s Freedom Party (PVV) of Geert Wilders will fare for pointers to the strength of populist movements elsewhere in Europe ahead of upcoming polls in France, Germany and (possibly) Italy,” strategists at RBC Capital Markets, said.

Federal Reserve

Also on Wednesday, investors anticipate that strong US jobs growth, upbeat economic data and hawkish remarks from a number of Federal Reserve officials, including chair Janet Yellen, have paved the way for the central bank to lift rates by a quarter percentage point, adding to its December rate rise, when it meets next week.

Following its two-day meeting the Fed will update its economic projections including GDP, the personal consumption expenditures index – its preferred measure of inflation – and the so-called dot plot that signals the path of interest rates. And investors will get to hear from Ms Yellen during a press conference.

Policymakers have currently pencilled in a median projection of three increases this year and investors will watch for any changes to the dot-plot of interest rate projections for this year and the next.

Economists at Goldman Sachs have pulled forward their forecast for the timing of Fed rate increases and now expect further tightening in March, June and September, compared to their previous projections of moves in March, September, and December. They also expect the Fed to begin the process of normalising its balance sheet in the fourth quarter of this year, from mid-2018 previously.

The Bank of England also sets monetary policy next week but economists expect it will leave rates unchanged.

Trump budget

President Donald Trump’s administration is expected to unveil the framework of its fiscal 2018 budget next week. The budget is expected to include a $54bn rise to military spending — the biggest jump in defence spending since 2008 — and Mr Trump has previously said a ‘revved up economy’ would pay for the boost. He has also previously indicated that he would shield programmes like social security and Medicare from cuts but most other discretionary spending programmes are likely to face cuts.

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