Macro Weekly
Group Economics
26 August 2016
Yellen hints Fed hike edging closer Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616
• • • •
Fed Chair Yellen signals that case for a rate hike is stronger… …but remains non-commital on the timing of the move US growth momentum turning up, eurozone flattening out Japan looks set for renewed deflation, which will trigger BoJ easing
nick.kounis@nl.abnamro.com
Yellen suggests Fed is edging closer to hike Fed Chair Yellen’s long-awaited speech at Jackson Hole is was seen as dovish by markets. Treasury yields fell following the speech. Although Ms Yellen sounded more sure about the case for a rate hike, she gave no definitive signal on the timing. This should be seen against the background that markets had already priced in a higher probability of a rate hike this year over recent days. So the hurdle for a hawkish surprise was rather high. Our base case remains that the Fed will leave interest rates on hold until early 2017, but the Fed Chair’s remarks, taken together with a more hawkish tone from other FOMC officials, as well as signs of a Q3 US growth rebound, suggest the chances of a rate hike by year end have indeed increased. Case for a rate hike has strengthened The Fed Chair asserted that ‘the case for an increase in the federal funds rate has strengthened in recent months’. This reflected that economic growth, while moderate, was still ‘sufficient to generate further improvement in the labor market’. Although the unemployment rate was stable ‘broader measures of labor utilization have improved’. In addition, although she admitted that inflation was still undershooting the Fed’s target, this was partly due to ‘transitory effects’. Overall, ‘the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time’. However, the Fed Chair left the timing of the rate hike open and also stressed that ‘our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook.’ US and eurozone set to change places Chair Yellen’s more positive tone may also reflect the improvement in the US data recently. The first half of this year saw the relatively rare occurrence of the eurozone economy outperforming that of the US. In the first two quarters, GDP growth averaged just below 2% annualised in the eurozone, compared to around 1% in the US. However, recent data suggest they are set to change places again.
Insights.abnamro.nl/en
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Macro Week kly – Yellen hin nts Fed hike ed dging closer – 2 26 August 2016
US inv vestment slu ump easing US ec conomic growtth has been he eld back by an n unusually agggressive inve entory correc ction that is un nlikely to be a drag much lon nger. Howeve r, more fundamentally, busine ess investmen nt has also bee en contracting g, reflecting thee correction in n the oil sectorr to lower price es, weak profits and lacklustre exports. D Data for capital goods orders s improved in JJune and July y suggesting th he investmentt slump will ea ase. Howev ver, given cap pital goods shipments are sttill weak, this m might be more e visible in Q4 tha an Q3. Overa all, we expect an improvement in US economic growth in the second d half of the year, though t the un derlying trend d is likely to be e moderate. O ne reason for this is that consumer demand w was buoyant in i Q2 and is likely to slow. T This will offsett some of the po ositive factors described abo ove. Euroz zone growth m momentum fllattening out On the e other side off the Atlantic, the economic recovery lookks to be stuck in a low gear. The T eurozone e composite PMI edged up to t 53.3 in Aug ust from 53.2 in July. This essentially e leavves the index in the range itt has been in for most of this year. At the sa ame time, the o other bellweth her survey – Germany’s G Ifo – fell in both July J and Augus st. One negativve aspect in both b the PMI and a Ifo surveyss is a clear do ownward trend in i business exxpectations. We ex xpect economiic growth in th he eurozone to o remain arounnd current mo oderate levels. A somewhatt stronger glob bal economy and a easy moneetary policy arre positives. On the e other hand, the impact of other positives – such as thhe fall in oil priices and the euro – is fading. In a addition, an ad dverse impactt due to Brexitt and political risk in Europe more generrally – is also a possibility. Japan n set for renew wed deflation n Japan n’s authorities look set to ‘sn natch defeat from the jaws oof victory’. Sinc ce the start of 2014, Japanese ccore inflation (ex ( food and energy) e has beeen in clear po ositive territorry after being negative for lo ong periods since 1999. Thiis raised hope es that the more aggressive a ma acro policy sta ance as part of o Abenomics ((for all its othe er shortc comings) was finally about to o defeat deflation. Howeverr, Japan is dan ngerously close to a new episo ode of renewe ed deflation. The T nationwidee core CPI (ex x food and energy y) fell to 0.3% yoy in July fro om 0.5% yoy in June. The ssame measure e for Tokyo, which is already ava ailable for Aug gust, declined to 0.1% yoy. Given the stre ength of the yen an nd the weakne ess of the eco onomy, the dow wnward trend is set to continue. All thiis sets the sce ene for the BoJ to announce e a stimulus paackage next month. m Howev ver, it begs the e question wh hy it has taken the central baank so long to o act. After a good start s to its QQ QE policy, it seems to have gone g back to bbeing cautious s. Next month h’s package rissks being too little, too late.
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Macro Week kly – Yellen hin nts Fed hike ed dging closer – 2 26 August 2016
Ma ain economic c/financial forrecasts GDP P grow th (%)
2014
2015
2016e
2017e
Unitted States
2.4
2.6
1.7
1.8
United States
Euro ozone
0.9
1.6
1.3
1.0
one Eurozo
Japan
3M interbank rate
1 18/08/2016 25/08/20 016
+3M
2016e
+12M
0.81
0 0.83
0.7
0.70
1.00
2017e 1.5
-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
1.5
0.5
United Kingdom
0.39
0 0.39
0.3
0.30
0.30
0.3
Chin na
7.3
6.9
6.5
6.0 1 18/08/2016 25/08/20 016
Worrld
3.4
3.1
2.9
3.1
Inflation (%)
2014
2015
2016e
2017e
+3M
2016e
+12M
2017e
Unitted States
1.6
0.1
1.4
1.9
US Treasury
1.54
1 1.58
1.4
1.40
1.60
1.8
Euro ozone
0.4
0.0
0.3
1.5
German n Bund
-0.08
-0 0.07
-0.2
-0.20
-0.10
0.1
Japan
2.7
0.8
0.0
1.0
Euro sw w ap rate
0.28
0 0.28
0.4
0.35
0.55
0.6
Unitted Kingdom
1.5
0.0
0.5
2.3
Japane ese gov. bonds
-0.08
-0 0.08
-0.2
-0.30
0.20
0.0
Chin na
2.0
1.4
2.0
2.0
UK gilts s
0.55
0 0.58
0.8
0.50
0.30
0.2
Worrld
3.5
2.9
3.1
3.2
Key y policy rate
25/08/2016
+3M
2016e
2017e
1 18/08/2016 25/08/20 016
+3M
2016e
+12M
2017e
Fed deral Reserve
0.50
0.50
0.50
1.25
EUR/US SD
1.13
1 1.13
1.10
1.10
1.10
1.10
Euro opean Central Bank
-0.40
-0.40
-0.40
-0.40
USD/JP PY
99.9
10 00.5
100.0
103.0
105.0
110
Ban nk of Japan
-0.10
-0.30
-0.30
-0.30
GBP/US SD
1.32
1 1.32
1.27
1.20
1.25
1.35
Ban nk of England
0.25
0.25
0.25
0.25
EUR/GB BP
0.86
0 0.86
0.87
0.92
0.88
0.81
Peo ople's Bank of China
4.35
4.35
4.10
3.85
USD/CN NY
6.63
6 6.66
6.70
6.80
6.90
7.00
10Y intterest rate
Curren ncies
Sou urce: Thomson Reutters Datastream, AB BN AMRO Group Ec onomics.
Ma ain economic//financial forrecasts
Day
Datte
Time
Country
Key Economic Indicators and Eve ents
Period
Latest ou utcome
Consensu us
Monday M M Monday
29/08/2 2016 29/08/2 2016
14:30:00
US US
PCE defllator core - % mom PCE defllator core - % yoy
Jul Jul
0.1 1 1.6 6
0.1 1.5
Tuesday T T Tuesday T Tuesday T Tuesday T Tuesday T Tuesday
30/08/2 2016 30/08/2 2016 30/08/2 2016 30/08/2 2016 30/08/2 2016 30/08/2 2016
01:30:00 06:30:00 11:00:00 14:00:00 15:00:00 16:00:00
JP NL EC DE US US
Unemplo oyment - % Producer confidence manufa acturing - index Econom ic sentiment monitor - index y CPI - % yoy S&P/Cas se Shiller house pricce index Conferen nce Board cons. con nfidence - index
Jul Aug Aug Aug P Jun Aug
3.1 1 5.1 1 104 .6 4 0.4 -0.1 1 97.3 3
104.2 0.5 0.0 96.7
We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday
31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016 31/08/2 2016
01:50:00 09:15:00 09:55:00 09:55:00 11:00:00 11:00:00 11:00:00 14:00:00 14:00:00 14:15:00 15:45:00 16:00:00
JP US DE DE EC EC EC IN BR US US US BR
Industria al production - % mom Fed's Ro osengren in Beijing (v) ( Unemplo oyment - % Unemplo oyment change - tho ousands Core inflation - % yoy y CPI - % yoy Unemplo oyment - % GDP - % yoy GDP - % yoy ADP nat. employment report - thousands Chicago Fed - business confidence - index om Pending home sales - % mo Policy ratte - %
Jul P
2.3 3
0.8
Aug Aug Aug A Aug Jul 2Q 2Q Aug Aug Jul Aug 31
6.1 1 -7 9 0.9 0.2 2 10.1 7.9 9 -5.4 4 178 .6 8 55.8 0.2 2 14.3 3
6.1 -2 0.9 0.3 10.0 7.7 -3.8 161.7 54.3 0.4 14.3
Thursday T T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday
01/09/2 2016 01/09/2 2016 01/09/2 2016 01/09/2 2016 01/09/2 2016 01/09/2 2016 01/09/2 2016 01/09/2 2016 01/09/2 2016
03:00:00 03:45:00 09:00:00 10:00:00 10:30:00 14:30:00 15:45:00 16:00:00 18:25:00
CN CN NE EC GB US US US US
PMI man nufacturing - index (o official) PMI man nufacturing - index (C Caixin) PMI nufacturing - index (fi nal est.) PMI man PMI man nufacturing - index Output per hour nonfarm bussiness sector - % qo oq F PMI Markit - Flash ISM man nufacturing - index Fed's Me ester Kentucky Philan ntropy Initiative (v)
Aug Aug Aug Aug F Aug 2Q F Aug F Aug
49.9 9 50.6 6 53.2 2 51.8 8 48.2 2 -0.5 5 52.1 52.6 6
49.9 50.2
Friday Friday Friday Friday Friday
02/09/2 2016 02/09/2 2016 02/09/2 2016 02/09/2 2016 02/09/2 2016
14:30:00 14:30:00 14:30:00 14:30:00 19:00:00
US US US US US
Change in employment priva ate employment - tho ousands Change in employment total - thousands oyment - % Unemplo Trade ba alance - USD bn Fed's Lacker on Interest Rate e Benchmark Richm mond (v)
Aug Aug Aug Jul
217 7 255 5 4.9 9 -44..5
Sou urce: Bloomb erg, Re euters, ABN AMRO Group G Economics (we e provide own foreca asts only for selected d key variab les and events) FOM M C (v) vo ting; (nv) no n vo tin ng
ABN AMRO
3.1 4.8 104.0 0.6 97.0
6.1 0.8 0.4 10.0 7.5 170.0
53.0 51.8 49.0 -0.5
48.5
52.1
52.5
167 175 4.8 -43.8
175 185 4.8
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Macro Week kly – Yellen hin nts Fed hike ed dging closer – 2 26 August 2016
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