Macro Weekly
Group Economics
16 September 2016
Time for a hike? Nick Kounis
• •
Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
• •
A Fed interest rate hike does not look likely next week We expect a hike in December, though the case for higher interest rates in general is far from convincing Meanwhile, the BoJ is likely to announce a monetary easing package The combination of a Fed on hold and BoJ stimulus could start to reverse bond market worries of an exit from easy monetary policy
FOMC meeting in focus this week The FOMC meeting next week will be of even more interest than usual. Commentary from Fed officials in the run up to the meeting has turned more hawkish suggesting that the central bank is edging closer to a rate hike. However, we think a rate hike next week is unlikely. Our base scenario is for a December move, but even then, the case does not seem overly convincing. More hawkish Fed commentary Many Fed officials have suggested that the time for higher interest rates is approaching. Fed Chair Yellen remarked at Jackson Hole that ‘the case for an increase in the federal funds rate has strengthened in recent months’. This seems to be where many Committee members are. They judge a rate hike is getting closer, but have been non-committal on the timing. Indeed, it could be argued that if they were really convinced of a September rate hike, they would have tried to prepare markets more than they have done. At time of writing, markets assign less than a 20% chance to a September rate increase, and that probability has always been comfortably below 50% in recent weeks. Data uncertainty Meanwhile, recent data may have created some doubts about the direction of the US economy, strengthening the case for the FOMC to wait. For instance, retail sales have been soft suggesting that consumer spending is slowing in Q3. The ISM reports deteriorated sharply in August, and are now at levels historically consistent with just 1% GDP growth. We do not think the US economy is set for a slowdown, a moderate growth trend looks likely. However, recent numbers do raise questions. The exception to this narrative is the labour market. Although nonfarm payrolls slowed in August, the underlying trend remains solid. On the other hand, there is not much sign of inflationary pressure coming from the labour market, and Fed’s preferred measure of inflation remains below target.
Insights.abnamro.nl/en
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Macro Week kly – Time for a hike? – 16 Se eptember 2016
A sign nal for Decem mber? Perhaps an even bi gger question n than whetherr the Fed will hhike or not, is what its guidan nce will be abo out future mon netary policy. The new projeections will tell us where FOMC C members exxpect interest rates r to be in the t coming moonths, as welll as where they expect e them to o settle in the long term. In June, J FOMC m members saw roughly two ra ate hikes this yyear and anoth her 3 hikes ne ext year, so 5 iin all to the en nd of 2017. We think that the FO OMC will move closer to our own baselinee of one hike this year and tw wo next. The F FOMC may als so stop short of o explicitly siggnalling a Dec cember hike in the FOMC statem ment. Overall, that would ma ake for a relatiively dovish Fed comm munication eve en though we are a moving clo oser to anotheer hike. The new normal Althou ugh we expectt a December hike, the case e is far from coonvincing give en the econo omic outlook. O One of the key y arguments put p forward forr higher rates is that policy rates are abn normally low and need to no ormalise. Howeever, it is diffic cult to know what exactly e norma l is for interest rates in the current c environnment. For ins stance, if interes st rates are so o abnormally lo ow, why is the e economy nott booming? One thing that is clear is that tthe normal or long-run intere est rate has coome down ove er the last OMC members have been lowering theirr estimates of the longer few ye ear. Indeed, FO run rate. Indeed, the ere might be some s further decline d in the F FOMC’s view of where interes st rates will se ettle in the long ger term from the 3% they eestimated in June (which still se eems rather hi gh to us). BoJ set s to expand stimulus The BoJ meets on tthe same day as the Fed. Given G that undeerlying inflatio on (ex food and en nergy) has fal len back and may even be on the cusp off going negative again, we think it is likely th hat the BoJ will w step up its monetary m stim mulus. We expe ect the centra al bank to cut rrates further in nto negative te erritory and inccrease its ass set purcha ase target. Fo or more, see our note Japan n Watch: Has tthe BoJ reach hed its limits? ? Fed and BoJ could d ease bond market m worrie es Over the t last few da ays, governme ent bond yields have been oon the up glob bally. There have been b concernss that central banks are reaching the limitts of their unconventional policie es, given practtical difficulties s of adding mo ore stimulus, aand perhaps less comm mitment from po olicymakers. The T possible resumption r of the Fed’s rate e hike cycle has ad dded fuel to th he fire. Of course, it is fair to o say that QE programmes are a having diminishing returns and central ba anks have bec come more caautious in step pping up stimulus over recen nt months. How wever, our sen nse is that glo bal monetary policy will remain n relatively acccommodative. The combina ation of a Fed on hold and BoJ B stimulus next week could start to reverse bond market worriees of early an exit from easy monetary m policcy.
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Macro Week kly – Time for a hike? – 16 Se eptember 2016
Ma ain economic c/financial forrecasts GDP P grow th (%)
2014
2015
2016e
2017e
Unitted States
2.4
2.6
1.5
1.9
United States S
Euro ozone
1.1
1.9
1.5
1.3
Eurozone
Japan
3M inte erbank rate
0 08/09/2016 15/09/20 016
+3M
2016e
+12M
0.85
0 0.85
0.8
0.80
1.20
2017e 1.4
-0.30
-0 0.30
-0.35
-0.35
-0.35
-0.35
-0.1
0.6
0.6
0.7
Japan
0.06
0 0.06
-0.1
-0.10
-0.10
-0.1
Unitted Kingdom
3.1
2.2
1.9
1.3
K United Kingdom
0.38
0 0.38
0.4
0.40
0.40
0.3
Chin na
7.3
6.9
6.5
6.0 0 08/09/2016 15/09/20 016
Worrld
3.4
3.2
2.9
3.2
Inflation (%)
2014
2015
2016e
2017e
+3M
2016e
+12M
2017e
Unitted States
1.6
0.1
1.4
1.9
US Trea asury
1.62
1.70
1.6
1.60
1.70
1.8
Euro ozone
0.4
0.0
0.3
1.5
German n Bund
-0.06
0 0.03
-0.2
-0.20
-0.10
0.1
Japan
2.7
0.8 ↓
-0.1
1.0
Euro sw w ap rate
0.32
0 0.38
0.4
0.35
0.55
0.6
Unitted Kingdom
1.5
0.0
0.5
2.3
Japane ese gov. bonds
0.20
0.0
Chin na
2.0
1.4
2.0
2.0
UK giltss
Worrld
3.5
2.9
3.1
3.2
Key y policy rate
15/09/2016
+3M
2016e
2017e
Fed deral Reserve
0.50
0.50
0.75
1.25
EUR/US SD
1.13
1.12
Euro opean Central Bank
-0.40
-0.40
-0.40
-0.40
USD/JP PY
102.5
Ban nk of Japan
-0.10
-0.30 ↑
-0.20
-0.30
GBP/US SD
10Y intterest rate
ncies Curren
-0.05 0.76
-0 0.05 ↑
-0.1 ↑
-0.20 ↑
0 0.89
0.6
0.50
0.50
0.2
0 08/09/2016 15/09/20 016
+3M
2016e
+12M
2017e
1.10
1.10
1.10
1.10
02.1 10
100.0
103.0
105.0
110
1.33
1.32
1.27
1.33
1.35
1.40
Ban nk of England
0.25
0.25
0.25
0.25
EUR/GB BP
0.85
0 0.85
0.83
0.83
0.81
0.79
Peo ople's Bank of China
4.35
4.35
4.10
3.85
USD/CN NY
6.66
6 6.68
6.70
6.80
6.90
7.00
Sou urce: Thomson Reutters Datastream, AB BN AMRO Group Ec onomics.
Min n economic/ffinancial forecasts Day
Date e
M Monday
19/09/2 016
Tuesday T T Tuesday T Tuesday
20/09/2 016 20/09/2 016 20/09/2 016
We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday
21/09/2 016 21/09/2 016 21/09/2 016 21/09/2 016 21/09/2 016 21/09/2 016
Thursday T T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday
22/09/2 016 22/09/2 016 22/09/2 016 22/09/2 016 22/09/2 016 22/09/2 016 22/09/2 016
Friday Friday Friday Friday Friday
23/09/2 016 23/09/2 016 23/09/2 016 23/09/2 016 23/09/2 016
Time
Country
Key Economic In ndicators and Events
Perriod
Latest outcom me
Consensus
A ABN AMRO
Sep
60
60
61
Consumerr confidence - index Base rate -% Housing sttarts - % mom
Sep Sep p 20 Au ug
2 0.9 2.1
0.9 -2.0
JP JP JP US US NZ
Policy rate - % in trl yen Merchandisse trade exports - % yoy Federal Fu unds Target Rate - Up pper bound Federal Fu unds Target Rate - Lo ower bound Policy rate - %
Sep p 21 Sep p 21 Au ug Sep p 21 Sep p 21 Sep p 22
-0.1 80.0 -14.0 0.5 0.25 2.0
-0.2 84.3 -5.2 0.5 0.28 2.0
-0.2 85-90
Policy rate - % Policy rate - % etin ECB publisshes Economic Bulle Repo rate - % FHFA housse price index - % mo om Draghi at ESRB E Frankfurt Existing ho ome sales - % mom
Sep p 22 Sep p 22
5.25 0.5
5.00
5.00
15:00:00 15:00:00 16:00:00
ID NO EC TR US EC US
Sep p 22 Jul
7.5 0.2
0.3
0.3
ug Au
-3.2
1.2
1.4
08:45:00 10:00:00 10:00:00 10:00:00 15:45:00
EC EC EC EC US
ECB's Con nstancio Chairs Pane el at ESRB Frankfurt PMI manuffacturing - index Composite e PMI output PMI service es - index Markit - Fla ash PMI
Se p P Se p P Se p P Se p P
51.7 52.9 52.8 52.0
51.5 52.8 52.8
51.3 52.6 52.5
US
NAHB hom me builders' confidencce index
06:30:00 14:00:00 14:30:00
NL HU US
01:50:00 20:00:00 20:00:00 23:00:00
10:00:00 10:00:00
3 -1.7
0.5 0.25
Sou urce: Bloomb erg, Reu uters, ABN AMRO Gro oup Economics (we provide p own forecastss only for selected ke ey variab les and eve ents) FOM C (v) vo ting; (nv) no n vo ting
Ma ain economic//financial forrecasts
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