Daily Insight
Group Economics Macro & Financial Markets Research
16 December 2015
Low inflation will not stop the Fed Maritza Cabezas Senior Economist Tel: +31 20 343 5618 maritza.cabezas@nl.abnamro.com
December’s FOMC meeting: US economy ready for a rate hike
US core inflation slowly edging up
Cautious Fed sees core inflation moving to target
Germany’s ZEW sentiment rises for second month in a row
Aline Schuiling Senior Economist Tel: + 31 20 343 5606
What to expect from December’s FOMC meeting
aline.schuiling@nl.abnamro.com
At Wednesday’s FOMC meeting, we expect the Fed to raise the target range of the federal funds rate by 25bps to 0.25%-0.5% and the interest rate on excess reserves (IOER) to 0.5% from 0.25%. We think that the FOMC statement will continue to covey that economic activity is expanding at a modest pace. However, it will be adjusted to signal that the labour market is strong, in contrast to the slow pace of job gains mentioned in the October statement. As for inflation, the Fed will likely signal that the strength of the labour market has made them reasonably confident that inflation will move back to mandateconsistent levels. Although FOMC members are in favour of a gradual increase of rates, we think that the statement will mention that further increase in the federal funds rate will be data-dependent, to imply that future movements will not follow a pre-determined tempo as in the past. This will give room for FOMC members to evaluate the impact of the first rate hike on financial conditions and on the Fed’s dual mandate. After the December liftoff, we think that the Fed will hike rates again in June, then two more hikes in September and December, reaching 1.25% at year-end 2016. US core inflation slowly edging up As Fed policymakers meet on Tuesday and Wednesday, inflation readings continue to show the impact of low energy prices. Indeed, headline inflation was flat on a month-onmonth basis in November down from 0.2%, while the annual rate was 0.5% in up from 0.2% the previous month. Inflation readings remain subdued as a result of low energy prices and health care costs, as well as a strong US dollar. Meanwhile core inflation, excluding food and energy, was 0.2% mom unchanged from the previous month, while the year on year was 2.0%, slightly up from 1.9%. Core inflation continued to be pushed up by increasing shelter costs (0.2%), which offset the falling core good prices (-0.2%). In the coming time, we expect headline and core inflation to pick up, as the base effects of energy prices and health costs fade away. More importantly, wages have started to rise at a moderate pace and this should also put a bit of pressure on inflation.
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Daily Insight – China data to give Janet some comfort – 15 December 2015
Cautious Fed has signaled core inflation moving to target Fed policymakers continue to think that the disappointing progress made in meeting the Fed’s inflation mandate, is mainly a result of the temporary fall in energy prices. The Fed follows the core personal consumption expenditure index, which excludes food and energy prices. This was just 1.3% yoy in October. Chair Yell in her latest speech from early December, mentioned that if the indirect effects of energy-related costs were taken away from core prices , the underlying rate of inflation would be around 1.5%-1.75%. The Fed has mentioned that as long as inflation moves in the direction of the Fed target, it could consider a rate hike. We think that given the favourable base effects, the FOMC statement could even drop the phrase that suggests that inflation will remain low. We expect that the overall picture of the economy will give the Fed sufficient confidence to hike rates in Wednesday’s meeting.
US inflation slowly picking up % yoy
6 5 4 3 2 1 0 -1 -2 05
06
07
08
09
CPI - all items
10
11
CPI - core
12
13
14
15
PCE - core
Source: Thomson Reuters Datastream
Rise in Germany’s ZEW sentiment signals a slight pick-up in growth in Q4 Germany’s ZEW economic sentiment increased to 16.1 in December, up from 10.4 in November. The series staged its second consecutive monthly rise, after it had fallen nonstop from April to October. The survey includes the impact of ECB’s latest policy easing measures, which fell short of the market expectations and resulted in a tightening of financial conditions. Still, participants to the ZEW survey became more positive about the outlook for Germany’s economy during the next six months, as well as for the eurozone as a whole. The view on the current economic situation in Germany and the eurozone improved somewhat as well. Although economic data for the fourth quarter in Germany is still scarce, surveys have generally painted a picture of a slight pick-up in economic growth from the 0.3% qoq that was recorded in Q3. Indeed, the composite PMI and Ifo’s business climate indicator improved in October-November, moving to levels well above their long-term averages.
3
Daily Insight – China data to give Janet some comfort – 15 December 2015
Day
Date
Time
Country
Saturday Saturday Saturday
12/12/2015 12/12/2015 12/12/2015
06:30:00 06:30:00 06:30:00
CN CN CN
Monday Monday Monday Monday Monday Monday
14/12/2015 14/12/2015 14/12/2015 14/12/2015 14/12/2015 14/12/2015
00:50:00 05:30:00 07:30:00 11:00:00 13:00:00 15:45:00
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
15/12/2015 15/12/2015 15/12/2015 15/12/2015 15/12/2015 15/12/2015 15/12/2015 15/12/2015 15/12/2015 15/12/2015
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Retail sales - % yoy Industrial production - % yoy Fixed asset investment - % yoy
Nov Nov Nov
11.2 6.2 10.2
11.1 5.7 10.1
JP JP IN EC IN EC
Tankan business conditions large enterprises Industrial production - % mom Wholesale price index - % yoy Industrial production - % mom CPI - % yoy ECB announces weekly QE details
4Q Oct F Nov Oct Nov
12.0 1.4 -2.0 0.6 5.4
11.0
09:30:00 10:30:00 11:00:00 14:00:00 14:30:00 14:30:00 14:30:00 14:30:00 14:30:00 16:00:00
SE GB DE HU US US US US US US
Policy rate - % CPI - % yoy ZEW index (expectation economic growth) Base rate -% Empire State PMI - Manuf. general business conditions - index Inflation excl food and energy - % mom Inflation excl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy NAHB home builders' confidence index
Dec 15 Nov Dec Dec 15 Dec Nov Nov Nov Nov Dec
-0.35 0.1 16.1 1.4 -4.59 0.2 2.0 0.0 0.5 61
0 0.1 15.4 1.4 -6.68 0.2 2.0 0.0 0.5 63
16/12/2015 16/12/2015 16/12/2015 16/12/2015 16/12/2015 16/12/2015 16/12/2015 16/12/2015 16/12/2015 16/12/2015 16/12/2015 16/12/2015
10:00:00 10:00:00 10:00:00 10:30:00 10:30:00 11:00:00 13:00:00 14:30:00 15:15:00 15:45:00 20:00:00 20:30:00
EC EC EC GB GB EC CZ US US US US US
PMI manufacturing - index PMI services - index Composite PMI output Claimant count unemployment rate - % Change in claimant count - thousands Core inflation - % yoy Repo rate - % Housing starts - % mom Industrial production - % mom Markit - Flash PMI Policy rate - % FOMC statement and press conference
Dec P Dec P Dec P Nov Nov Nov F Dec 16 Nov Nov Dec P Dec 16 Dec 16
52.8 54.2 54.2 2.3 3.3 0.9 0.05 -11.0 -0.2 52.8 0.25
52.7 54.1 54.1 2.3 2.5 0.9 0.05 8.0 -0.2
0.05 9.0 -0.2
0.5
0.5
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
17/12/2015 17/12/2015 17/12/2015 17/12/2015 17/12/2015 17/12/2015 17/12/2015 17/12/2015
00:50:00 07:30:00 10:00:00 10:00:00 10:30:00 14:30:00 14:30:00 20:00:00
JP NL DE NO GB US US MX
Merchandise trade exports - % yoy Unemployment rate Ifo - business climate - index Policy rate - % Retail sales - % mom Initial jobless claims - thousands Philadelphia Fed - business confidence - index Policy rate - %
Nov Noc Dec Dec 17 Nov Dec 12 Dec Dec 17
-2.20 6.9 109.0 0.75 -0.6 282 1.9 3.0
-1.60
Friday Friday
18/12/2015 18/12/2015
06:30:00
NL JP
Consumer confidence - index Policy rate - %
Dec Dec 18
9 80.0
-2.6 0.2 5.3
108.9 0.58 0.7
ABN AMRO
0.1
0.1 10.0
0.2 1.9 0.0 0.5 63 52.1 53.9 53.8
6.9 108.4 0.75
1.0 3.1 9
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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