Daily Insight
Group Economics Macro & Financial Markets Research
07 July 2016
Fed divided on economic outlook Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Fed minutes - The minutes of June’s FOMC meeting showed a divided Fed on the economic outlook and on the future path of policy rates. The minutes were released after May’s disappointing US labour market report, but before the Brexit referendum. For some FOMC policymakers the broad labour market remained healthy. They mentioned that the weak employment growth may reflect supply constraints associated with a general tightening of labour market conditions. In contrast, some noted that the lower rate of payroll gains could instead be indicative of a broader slowdown in growth of economic activity. This difference in views on the labour market and on the economy in general, resulted in a divided Fed on the appropriate path for monetary policy. Most participants judged that in the absence of shocks it would be appropriate to raise the federal funds rate, while some participants were uncertain whether economic conditions were appropriate for a rate hike. The uncertainty emanating from the UK's vote to leave the EU may make the hawkish officials that wanted to hike rates more cautious. We continue to expect the Fed to remain on hold this year. Please see our Fed Watch here for more details on the FOMC minutes. (Maritza Cabezas) US economy – Incoming economic data are showing some improvement. Although May’s labour market report was disappointing, other data have been more positive. Growth of consumer spending picked up in the second quarter from the slow pace in the first quarter, while other labour market indicators continue to show signs of improvement. Indeed June’s ISM nonmanufacturing survey released on Wednesday showed a strong rebound. The employment component of this report improved significantly from the depressed levels seen in the month before (52.7 versus 49.7). Elsewhere, there was an improvement in new exports orders (53.0, previous: 49.0) and imports (54.0, previous: 53.5). Although it looks like the economy accelerated in Q2 following very weak Q1, and payrolls will most likely pick up in June following the weak May number, the underlying trends in both look likely to remain rather moderate. This is another factor behind our view that the Fed will stay on the sidelines this year. (Maritza Cabezas) FX and precious metals - On Wednesday, fears that the fallout of Brexit would have larger consequences for the global economy and financial markets resulted in a deterioration of investor sentiment. As a result, the yen strengthened across the board and USD/JPY was moving closer to the 100 level at time of writting. The US dollar rose especially strongly versus sterling, emerging market currencies and currencies of commodity exporters. Gold and silver prices also rallied because of safe haven demand. Gold prices broke above the price peak just after the Brexit vote. We expect the price rally in gold and silver to continue in Q3. Therefore, we have upgraded our Q3 forecast for gold to USD 1,425 per ounce ( was 1,350) and silver USD 21.5 (was 19) per ounce. Please see our note here for more on our precious metals forecasts. (Georgette Boele)
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