Daily Insight
Group Economics Macro & Financial Markets Research
7 January 2016
Low inflation worries Fed Maritza Cabezas Senior Economist Tel: +31 20 343 5618 maritza.cabezas @nl.abnamro.com
Labour market remains the shining star in US economy
Other indicators suggest US economy is slowing
FOMC minutes: Fed needs to see confirmation that inflation will actually rise before additional rate increases
Gradual pace of rate hikes most appropriate strategy for Fed
The ADP private payrolls report points to the resilience of US labour market December’s ADP report showed that private employment increased by 257K. The November gain was revised down slightly to 211K from 217K. This was the largest job gains of the year, supported mainly by the service sector. The energy industry was the only one shedding jobs. Hiring was broad based as small, medium and large firms stepped up hiring.
US labour market resilience continues 000’s
600 400 200 0 -200 -400 -600 -800 -1000 06
07
08
09
10
Private nonfarm payrolls
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12
13
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ADP employment
Source: Thomson Reuters Datastream
Nonfarm payrolls on Friday should confirm strength of labour market The ADP report is generally an appetizer for Friday’s nonfarm payrolls report. We look for an increase of 230K in the December’s nonfarm payrolls and unemployment to remain at 5%, as we expect the participation rate to edge up. However, we don’t expect above-trend job growth throughout the year. Job growth should moderate as productivity recovers. Meanwhile, the US inflation picture should improve as the tighter labour market leads to rising wages and oil prices gradually pick up in the course of 2016.
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Daily Insight – Low inflation worries Fed– 6 January 2016
Recent US economic data point to some slowdown in US Q4 GDP growth Data released since the FOMC meeting suggest that the US economy will likely slowdown in the fourth quarter of 2015. The ISM composite points to a slower expansion of growth at the end of 2015. Manufacturing surveys and construction data corresponding to the fourth quarter have been soft. A strong dollar and low energy prices are taking their toll on manufacturing activity. Services have been doing better, but are unable to offset the weakness of manufacturing and construction. We expect GDP growth to slow from the 2% reported in the third quarter to around 1.3% in Q4. FOMC minutes suggest Fed “significantly concerned” about low inflation The FOMC minutes from the December meeting, released on Wednesday show that although the decision to hike rates was unanimous, members were still “significantly concerned” about the inflation outlook. Despite that most members saw the downward pressure on inflation from lower energy and commodity prices as transitory, many members viewed this persistent weakness as adding uncertainty or downside risks to the inflation outlook. Indeed, some expressed concerns that inflation expectations may have moved lower or would do so if inflation persisted for much longer at a rate below the Committee’s objective. This is why the Committee decided to indicate that they would carefully monitor actual and expected progress towards the inflation goal. Some FOMC members mentioned that in determining the timing and size of the rate increases in 2016, it was important to confirm that inflation would rise as projected. Gradual pace of rate hikes most appropriate The minutes signal that the Fed will likely wait a few months before raising interest rates probably until June. The divergence between the Fed and other central banks will continue to support the US dollar and tighter financial conditions. Meanwhile low oil prices will continue to affect US investment and manufacturing in energy related activities. On the other hand, we expect to see strong domestic demand and a robust nonmanufacturing sector going forward. Inflation should eventually move in the direction of the Fed’s target, coming near in 2017. This supports our view of a slow pace of rate hikes. We expect three rate hikes in 2016 taking the target range to 1.25% by end-2016.
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Daily Insight – Low inflation worries Fed– 6 January 2016
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