Data released on the US and UK economies on Friday shows the global recovery remains on track. However, while UK growth picked up slightly in the final three months of the year, US growth actually softened.
Preliminary estimates show the US economy grew at a 2.6% pace in the fourth quarter of 2017, a marked decline from the 3.2% rate of the prior quarter.
This should do little to cloud the global growth outlook, especially as investors can look forward to the prospect of $1.5tn worth of US tax cuts working their way through the system.
The generally upbeat global growth outlook was highlighted by the International Monetary Fund (IMF) this week.
Pointing to the likely stimulatory effects of US tax reforms, which includes sweeping tax cuts with a controversial reduction in the top rate of US corporate tax from 35% to 21%, the IMF raised its growth forecasts for both 2018 and 2019, to 3.9%.
It marks a 0.2% increase in the IMF´s global growth estimate for both years.
Economists remain constructive on the outlook for US growth.
“We continue to forecast 3% full-year growth for 2018. Strong domestic momentum will be boosted somewhat by tax cuts, while dollar softness puts the US in a great position to benefit from the global upturn in demand,” said James Knightley, chief economist at ING.
If anything, the decline in quarterly growth in the final three months of 2017 could help Donald Trump justify the tax cuts that he signed into law in December.
While the tax reforms were hotly contested by leading Democrats, the corporate tax cuts have proved overwhelmingly popular with corporate America.
One by one, US firms have been reporting a one-off hit to fourth quarter financial results on the back of the reforms, but at the same time raising their longer-term outlooks as they look forward to big tax savings over the coming quarters.
At 2.6%, fourth-quarter US growth disappointed economists´ median expectations of a 3% rate of expansion.
A slower pace of inventory accumulation was partly to blame. But there was also a big uptick in imports weighing on the overall growth figure, partly a reflection of strength in US consumer spending.
Perhaps though, the most important message in the US data released on Friday was on inflation.
There was a substantial rise in the core personal consumption expenditures index, which excludes volatile factors such as food and energy, jumping to 1.9% in the fourth quarter.
This was much higher than the 1.3% rate registered in the third quarter, and also ahead of economists´ expectations of a 1.7% reading.
It confirms the trend suggested by core US consumer prices released early this month, which suggested US consumer prices had risen at their fastest pace in almost a year in December, at 1.8% excluding food and energy, compared with 1.7% in November.
With the US Federal Reserve (Fed) having already committed itself to three interest rate hikes in 2018, following on from the three rate increases of 2017 that took US rates to 1.5%, there´s every reason to suspect the Fed could go further this year.
The year 2018 could well be the year that US inflation takes off, justifying the Fed to adopt a more hawkish stance against a backdrop of buoyant growth and employment, possibly raising rates on four occasions rather than three.
Provided the US economy continues to show positive momentum, we could see a US rate rise as soon as March.
A more hawkish tone from the Fed may be enough to reverse the recent weak trend in the dollar.
Currencies such as the euro and the pound have been making substantial gains against the dollar of late, with the greenback partly hobbled by some of the less market-friendly policies of Donald Trump.
While 2017 saw the dollar suffer from an FBI probe into alleged collusion between figures behind the Trump presidential campaign and Moscow, the first few weeks of 2018 have been punctuated by concerns over the administration´s protectionist agenda.
This week, the dollar suffered from worries over a possible trade war as the US unveiled tariffs on imports of washing machines and solar panels.
The pound has been on a tear, meanwhile, reaching a new post-Brexit high of $1.42.
Generally positive data on the UK economy this week has provided a major boost to sterling, with figures showing the number of people in employment jumped to a record high in November.
Data released on Friday also showed UK economic growth had picked up to 0.5% in the fourth quarter of 2017 compared with 0.4% in the prior quarter and ahead of economists´ expectations of 0.4%.
The pound has now gained around 5% against the dollar since the start of the year, so many traders will be scratching their heads as to how further forward the sterling rally can go.
At present, the pound appears to have the wind in its sails, so it´s difficult to discount the prospect of sterling reaching the $1.50 mark within the next few months.
On the other hand, a further uptick in US inflation could see the trade unwind, even as UK economic data remains buoyant and assuming further progress is made on the Brexit front.
In combination with this, the recent improvement in sterling should take the pressure off the Bank of England (BoE), especially as most of the acceleration in UK inflation witnessed last year was attributed to the earlier depreciation of sterling, as higher prices of imports fed through to the high street.
A simultaneously more hawkish Fed and a more dovish BoE could easily halt this sterling rally in its tracks.