Follow Paul Donovan

Signalling effects

| Posted by: Paul Donovan | Tags: Paul Donovan

  • Economists pay a lot of attention to signalling effects. Actions generate signals about broader policy motives. US President Trump's travel ban against seven predominantly Muslim countries is a signal that has economic consequences. The signal from the original act persists even if the original act is subsequently modified. 
  • How the signal is perceived matters. If (regardless of intent) the signal is perceived as anti-Muslim, Middle Eastern investors may question the security of their US investments. Middle Eastern investors have already been selling US assets to fund the purchase of European goods and services. This flow could accelerate.
  • The French Socialist Party primaries saw the perceived anti-establishment Hamon defeat former Prime Minister Valls. Opinion polls suggest that the Socialist Party candidate is unlikely to make it to the second round of the presidential elections. However, the vote may be interpreted as further evidence of political populism. 
  • German consumer price inflation is due. The divergence of Euro area inflation is likely to see Germany with one of the highest rates of increase, and that may increase tensions within the ECB. Japanese retail sales disappointed in December – high inflation perceptions may be dampening consumer spending.