Group Economics
Daily Insight
Macro & Financial Markets Research Nick Kounis & Maritza Cabezas
Fed hike now seen in 2016
+31 20 343 5616
8 October 2015 • We now think the Fed will likely delay its first rate hike to 2016, given EM risks and softer macro data • This makes additional ECB and BoJ easing even more likely, while the BoE will delay hiking to Q3 • EUR/USD will be in a range in Q4 as extra ECB QE offsets the scaling back of Fed hike expectations Adjusting our Fed rate hike view
Federal Funds Rate forecasts
We now think that the Fed will further delay raising interest rates
%
beyond December and into 2016. Uncertainty is high about the exact month, but our sense is that the first hike will not come until
1.4
1.5
June 2016. We expect a rate hike every other meeting after that, which would leave the target for the fed funds rate in a range of
0.9
1.0
0.75-1% in December 2016. A delay will give the Fed time to allow financial conditions to stabilize, external uncertainties to wane and data to improve again. We don’t rule out a rate hike in March 2016
0.64 0.4
0.5 0.19
0.15
if this process turns out to run relatively quickly.
0.0 External headwinds a drag on the US economy
Market
A stronger dollar and the slowdown in emerging markets,
Fed 2015
ABN AMRO
2016
particularly in China has exposed some soft spots in the US economy. In the first half of the year, net trade has turned into a
Source: Bloomberg, ABN AMRO
drag for the US economy and recent data has also shown a further widening of the trade deficit in the third quarter. Meanwhile, exportoriented manufacturing activity has been slowing in response to weaker foreign demand. Market tensions and a stronger dollar have combined over recent months to tighten financial conditions, meaning there is less need for an imminent rate hike. US labour market takes a break A couple of disappointing job market reports in August and September have marked a break from the past few quarters when the labour market recorded a solid performance. Indeed, a strong labour market has been one of the flagships for the majority of FOMC members supporting a rate hike this year. The diminishing slack in the labour market is expected to push up wages, but this may take a bit more time than we had expected. Moreover inflation pressures are still subdued. We think that these developments will make FOMC members more cautious. More time to see economy stronger and external risks easing Indeed, we think the Fed will need more time to be sure that the US economy is ready for a rate hike. We think over time there will be signs that the Chinese authorities are managing to keep the slowdown in the economy gradual. This will also bring more stability to commodity markets and improve sentiment in emerging markets, helped by the Fed's delay. This over time will likely boost US economic data.
Fed's delay: a knock on effect to other central banks If the FOMC does put the rate hike on ice as we expect, it will lead to reactions from other central banks. This is because all other things being equal, it will weaken the dollar and hence strengthen other currencies. For instance, the EUR/USD could surge to above 1.15, if there were to be a Fed delay, without any offsetting ECB action. The ECB is currently assuming a EUR/USD rate of 1.10. So we think this would add to the case for further easing against the background of the fall in commodity prices and the rise in EM risks over recent months. Our base scenario was already for an increase in the ECB's monthly purchases by EUR 20bn. This looks likely to come in December rather than this month give recent ECB commentary. We now think that the ECB will also extend the time horizon for QE through the end of 2016. The risks of yet more decisive action have increased. Further QE by the ECB will offset the impact of the Fed delay, keeping EUR/USD at around 1.12 this year. Meanwhile, the BoJ will likely step up QE early next year, but the chances of an earlier move are now also much bigger. Finally, we are also pushing back our forecast for the first BoE hike to Q3 of next year, from Q1 previously. More analysis of the implications of all this for our FX, precious metals and fixed income calls will follow in additional notes later this week.
2
Fed hike now seen in 2016 – 8 October 2015
Financial markets Currency markets
Close
Change 1 day
Change 5 days
Change YTD
EUR/USD USD/JPY
1.1241
0.0356
0.4109
119.85
-0.1333
-0.0667
-7.0838 0.0584
AUD/USD
0.7192
-0.2220
2.3044
-12.0245
USD/CHF
0.9733
-0.0308
-0.3991
-2.1120
NZD/USD
0.6610
0.0000
3.2974
-15.2238 -1.6820
GBP/USD
1.5315
-0.0261
1.2160
USD/SGD
1.4123
-0.0071
-1.2861
6.5485
USD/CAD
1.3066
0.0689
-1.5225
12.4344
Bond markets
Close
Change 1 day
Change 5 days
Change YTD
2-year German Govt Bond yield
-0.2500
-0.0030
0.0020
-0.1520
10-year German Govt Bond yield
0.5930
-0.0030
0.0060
0.0520
Yield curve Germany
0.8430
0.0000
0.0040
0.2040
2-year US Treasury Bond yield
0.6250
0.0000
-0.0197
-0.0395
10-year US Treasury Bond yield
2.0633
-0.0035
0.0265
-0.1079
Yield curve US
1.4383
-0.0035
0.0462
-0.0684
US 2-year sw ap rates
0.7522
0.0032
-0.0148
-0.1421
US 10-year sw ap rates
2.0503
0.0043
0.0237
-0.2358
US sw ap curve
1.2981
0.0011
0.0385
-0.0937
EU 2-year sw ap rates
0.0560
0.0010
0.0090
-0.1190
EU 10-year sw ap rates
0.9748
-0.0022
0.0468
0.1628
EU sw ap curve
0.9188
-0.0032
0.0378
0.2818
-0.0460
0.0000
-0.0060
-0.1240
Euribor 3 Month ACT/360 ICE LIBOR USD 3 Month
0.3180
-0.0052
-0.0075
0.0624
JPMorgan EMBI Plus Sovereign S
409.7900
-4.6400
-33.0100
22.3500
Equity markets
Close
Change 1 day % Change 5 days %Change YTD%
Nikkei 225
18,323
0.75
3.39
5.00
Hang Seng Index
22,516
3.13
9.53
-4.61
Hang Seng China Enterprises Index
-13.27
10,395
4.66
12.61
Australian Stock Exchange S&P/ASX 200 Index
5,239
0.79
2.48
-3.18
Singapore Straits Times Index
2,962
2.22
6.12
-11.99
Euro Stoxx 50 Index
3,226
0.20
4.05
2.54
S&P 500 Index
1,996
0.80
3.95
-3.06 -2.12
MSCI World Daily Total Return Gross USD
751
0.97
4.85
AEX Index
441
-0.03
4.62
3.80
18
-5.15
-24.90
-4.17
Chicago Board Options Exchange Volatility Index
Commodity markets Reuters/Jefferies CRB Total Return Gold spot USD/Oz Generic first NYMEX Crude Light future Generic first Brent Crude Oil future LME Copper 3 Months Rolling Forw ard Generic first Wheat future Chicago Board of Trade Source: Bloomberg
Close
Change 1 day % Change 5 days %Change YTD%
200
-0.27
3.01
1,146
0.05
2.92
-13.18 -3.27
48
0.92
7.85
-9.42
51
-1.14
6.12
-10.47
5,187
0.04
0.52
-17.67
517
-1.81
0.78
-12.38
3
Fed hike now seen in 2016 – 8 October 2015
Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
ABN AMRO
Monday Monday Monday Monday Monday Monday Monday
05/10/2015 05/10/2015 05/10/2015 05/10/2015 05/10/2015 05/10/2015 05/10/2015
09:00:00 10:00:00 10:00:00 10:30:00 11:00:00 15:45:00 16:00:00
CH EC EC GB EC EC US
Total Sight Deposits bn PMI services - index Composite PMI output PMI services - index Retail sales - % mom ECB announces weekly QE details ISM non-manufacturing, index
Sep F Sep F Sep Aug
465 53.7 53.6 53.3 0.0
54.0 53.9 56.7 0.0
54.0 53.9
Sep
56.9
58.1
Tuesday Tuesday Tuesday
06/10/2015 06/10/2015 06/10/2015
08:00:00 14:30:00
DE US PL
Manufacturing orders - % mom Trade balance - USD bn Reference rate - %
Aug Aug Oct 6
-1.4 -41.9 1.5
0.3 -43.4 1.5
-0.2
Wednesday Wednesday Wednesday Wednesday
07/10/2015 07/10/2015 07/10/2015 07/10/2015
08:00:00 09:00:00 21:00:00
DE CH US JP
Industrial production - % mom Foreign currency reserves - CHF mln Fed Reserve consumer credit - USD bn Policy rate - %
Aug Sep Aug Oct 7
-1.2 541.5b 16.0 80.0
0.0
-0.1
Thursday Thursday Thursday Thursday Thursday Thursday
08/10/2015 08/10/2015 08/10/2015 08/10/2015 08/10/2015 08/10/2015
01:50:00 13:00:00 13:00:00 13:25:00 13:30:00 20:00:00
JP GB GB NL EC US
Machinery orders private sector - % mom Policy rate - % BoE size of asset purchase programme - GBP bn CPI - % yoy ECB account of the monetary policy meeting of 3 September FOMC minutes Sept. 16-17
Aug Oct 8 Oct Sep
-5.7 0.5 375.0 0.8
2.8 0.5
Friday
09/10/2015
10:30:00
GB
Trade balance - GDP mln
Aug
-3371.0
-2066.7
-0.1
1.5
19.1 80.0
Sep
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
Find out more about Group Economics at: https://insights.abnamro.nl/en/ This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. © Copyright 2015 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").