Macro Weekly
Group Economics
06 November 2015
Will the Fed walk the talk?
After a strong job report, the Fed is likely to raise rates in December
Macro & Financial Markets Research
Germany’s industrial sector is going through tough times …
Tel: +31 20 343 5618 / 5606
…but the outlook for the eurozone economy remains one of
Maritza Cabezas & Aline Schuiling
maritza.cabezas@nl.abnamro.com aline.schuiling@nl.abnamro.com
ongoing recovery Just a few weeks ago, the Fed had been delivering mixed messages about the possibilities of a rate hike. The statement of the October meeting, however, introduced more hawkish language, increasing the probability of a December rate hike. We think that October’s job report has made a liftoff in December more likely. Although our base case was a rate hike in 2016, we think that the direction of the labour market is now undoubtedly a strong one, enough to get inflation back to the 2% target at a faster pace. October’s US job report strong from many sides The October job report shows that the US economy is shrugging off the impact of the earlier financial stress. Nonfarm payrolls increased by 271K in October after a downwardly revised 137K the previous month, while August was revised up by 17K. This increase in nonfarm payrolls was much higher than the consensus forecast of 185K. The unemployment rate edged down to 5% from 5.1% the previous months. Average hourly earnings, increased by 0.4% mom, after being flat in September. Part time employed workers looking for a full time job also improved to 9.8%, the lowest since 2008. The participation rate, however, has remained unchanged since August, at 62.4%. The participation rate matters, but we think that it’s just a question of time before the labour market attracts more entrants. Finally, from a sector perspective hiring in the manufacturing sector remains soft, with no job gains in October. What is the Fed looking for in the labour market? One of the requirements for a rate hike this year is that “the labour market improves further” as mentioned in the last FOMC statement. October’s and November’s labour market reports play a critical role in this decision. But that is not all. Chair Yellen, since the beginning of her mandate, has relied on a broader range of indicators to determine the slack of the job market. There is not much concern about the nonfarm payrolls and unemployment rate. Both have been pointing to a tighter labour market in the past year. Meanwhile, indicators that measure the flows in the labour market, such as the quits and the hiring rates, have shown a moderate growth pattern. And
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Macro Weekly – Will Fed walk the talk? – 6 November 2015
there is increasing evidence that certain sectors are having more and more difficulty finding the right applicants. The weaker spots in the labour market recovery, have been the participation rate, the still high number of part-time workers, who want to work full time (the U-6 measure) and wages. The Fed’s Chair has said that the unemployment rate can run below the 4.9% - considered consistent in the long run with an inflation at 2%. This would give the Fed more certainty that inflation would get back on track. There is still the November jobs report that would have to confirm this path. Stronger wage growth, for instance would help. A renewed tightening of financial conditions, resulting from a strong USD can, however, put a bit of pressure on the economy, but the underlying momentum seems strong enough to withstand this. Market response to US job report The strong job report triggered a sharp rise in bond yields and a stronger dollar. The more positive than expected report led markets to price in a higher probability of a Fed rate hike in December this year (rising up to 72% from 58% before the release). US labour market rebounds 000’s
%
600 400 200 0 -200 -400 -600 -800 -1000
12 10 8 6 4 2 0 06
07
09
10
Non farm payrolls (lhs)
12
13
15
Unemployment (rhs)
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
Tough times for Germany’s industrial sector … Germany’s factory orders and industrial production both declined in September, as well as during Q3 as a whole. Factory orders fell by 1.7% mom in September, while industrial production declined by 1.1% mom. Consequently, during Q3 as a whole, orders fell by 2.8% qoq and production declined by 0.2. The details of the orders data clearly show that the weakness is concentrated in demand for German industrial goods from outside the eurozone. Indeed, domestic factory orders increased by 0.2% qoq in Q3, while total orders from other eurozone countries increased by 1.0%. Meanwhile, orders from foreign countries outside the eurozone plummeted by 8.6% qoq. These numbers probably reflect the relatively large share of the BRICs and other emerging markets in Germany’s exports (see graph). Moreover, the positive impact of the euro-depreciation in the second half of last year and first months of this year seems to be waning.
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Macro Weekly – Will Fed walk the talk? – 6 November 2015
German factory orders % 3m-o-3m
10 5 0 -5 -10 Jan-13
Jul-13
Jan-14
Jul-14
Non-eurozone
Jan-15
Eurozone
Jul-15 Domestic
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
… whereas Germany’s domestic demand remains resilient Meanwhile, domestic demand in Germany seems to be more resilient. Retail sales rose by 0.9 % qoq in Q3, following a 0.3% decline in Q2, which acceleration more than compensated for a sharp drop in car sales in Q3. Moreover, the services sector PMI increased during the past few months, rising from 53.8 in June to 54.5 in October, signalling stronger growth in services sector output in Q3. Also, construction output increased by 0.7% qoq in Q3, following a decline by 1.6% in Q2, suggesting that residential investment picked up as well in Q3. Finally, a rise in orders for capital goods by German companies signals that investment in machinery and equipment expanded as well. Thanks to the resilience of domestic demand, we think that GDP growth, which will we published on 13 November, merely slowed down from 0.4% qoq in Q2 to 0.3% in Q3. This was despite the negative contribution from industrial production. Share of BRICs in total exports % 2014
15
10
5
0 FN
DE
IT
FR
BE
AT
ES
NL
PT
IR
GR
Source: IMF, Direction of Trade Statistics, Thomson Reuters Datastream
Eurozone as a whole holds on to growth momentum Despite the expected slowdown in German GDP growth, we still see growth in the eurozone as a whole stabilising at 0.4% qoq in Q3 (data will be published on 13 November, as well). Although GDP growth in Spain, (already released on 30
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Macro Weekly – Will Fed walk the talk? – 6 November 2015
October) edged lower, it seems to have either picked up or stabilised in the other three big-5 countries (France, Italy and the Netherlands). Stabilisation of eurozone GDP growth in Q3 was also suggested by monthly indicators such as the composite PMI and the European Commission’s Economic Sentiment Indicator.
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Macro Weekly – Will Fed walk the talk? – 6 November 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
1.5
2.4
2.6
2.7
United States
-0.2
0.9
1.6
2.0
Eurozone
Japan
1.6
-0.1
0.7
1.2
United Kingdom
2.2
2.9
2.8
2.6
China
United States Eurozone
3M interbank rate
29/10/2015 05/11/2015
+3M
+12M
2015e
0.33
0.34
0.4
0.8
0.4
2016e 1.0
-0.07
-0.07
-0.15
-0.15
-0.15
-0.15
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
0.58
0.58
0.7
1.5
0.7
1.7
29/10/2015 05/11/2015
2016e
7.7
7.3
7.0
6.5
World Inflation (%)
3.0 2013
3.1 2014
2.9 2015e
3.4 2016e
+3M
+12M
2015e
United States
1.5
1.6
0.1
1.8
US Treasury
2.17
2.24
1.9
2.5
1.9
2.6
Eurozone
1.3
0.4
0.1
1.4
German Bund
0.54
0.61
0.4
0.9
0.4
1.0
Japan
0.3
2.8
0.6
1.0
Euro sw ap rate
0.92
0.95
0.7
1.2
0.7
1.2
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.30
0.32
0.7
1.0
0.7
1.0
China
2.6
2.0
1.5
2.0
UK gilts
1.92
1.97
2.0
2.6
2.0
2.7
World Key policy rate
4.1 05/11/2015
3.7 +3M
3.6 2015e
3.9 2016e
29/10/2015 05/11/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.25
0.25
1.00
EUR/USD
1.10
1.09
1.10
1.00
1.10
1.00
European Central Bank
0.05
0.00
0.00
0.00
USD/JPY
121.1
121.8
122
133
122
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.53
1.53
1.57
1.45
1.57
1.47
Bank of England
0.50
0.50
0.50
1.00
EUR/GBP
0.72
0.71
0.70
0.69
0.70
0.68
People's Bank of China
4.35
4.35
4.35
3.85
USD/CNY
6.36
6.34
6.40
6.55
6.40
6.55
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
Key Global Macro Events Day
Date
Sunday Sunday
08/11/2015 08/11/2015
Monday Monday
09/11/2015 09/11/2015
Tuesday Tuesday Tuesday Tuesday Tuesday
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Oct Oct
-3.7 -20.4
-3.2 -15.2
ABN AMRO
CN CN
Exports - % yoy Imports - % yoy
09:00:00 15:45:00
CH EC
Total Sight Deposits bn ECB announces weekly QE details
10/11/2015 10/11/2015 10/11/2015 10/11/2015 10/11/2015
02:30:00 12:00:00 15/11/2015 15/11/2015 15/11/2015
CN US CN CN CN
CPI - % yoy NFIB small business optimisme - index M2 money growth - % yoy New yuan loans - CNY bn Aggregate financing - CNY bn
Oct Oct Oct Oct Oct
1.6 96.1 13.1 1050.0 1302.8
1.5 96.2 13.2 800.0 1000.0
Wednesday Wednesday Wednesday Wednesday Wednesday
11/11/2015 11/11/2015 11/11/2015 11/11/2015 11/11/2015
06:30:00 06:30:00 06:30:00 10:30:00 10:30:00
CN CN CN GB GB
Fixed investment - % yoy Retail sales - % yoy Industrial production - % yoy Claimant count unemployment rate - % Change in claimant count - thousands
Oct Oct Oct Oct Oct
10.3 10.9 5.7 2.3 4.6
10.2 10.9 5.8 2.3 0.9
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
12/11/2015 12/11/2015 12/11/2015 12/11/2015 12/11/2015 12/11/2015 12/11/2015 12/11/2015 12/11/2015 12/11/2015
00:50:00 08:00:00 11:00:00 13:00:00 14:30:00 15:30:00 16:00:00
Machinery orders private sector - % mom CPI - % yoy Industrial production - % mom CPI - % yoy Initial jobless claims - thousands Yellen makes welcoming remarks at Fed Policy Conference US Job Openings by Industry Policy rate - % GDP - % yoy Dudley speaks on economy and policy in New York
Sep Oct F Sep Oct Nov 7
-5.7 0.3 -0.5 4.4 276
3.6 0.3 -0.1
-0.3
Sep Nov 12 3Q A
5370 1.5 -4.6
1.5 -4.4
-4.4
18:15:00
JP DE EC IN US US US KR RU US
Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday
13/11/2015 13/11/2015 13/11/2015 13/11/2015 13/11/2015 13/11/2015 13/11/2015 13/11/2015 13/11/2015 13/11/2015 13/11/2015
00:00:00 05:30:00 06:30:00 07:30:00 08:00:00 11:00:00 14:30:00 14:30:00 14:30:00 16:00:00 16:00:00
US JP NL FR DE EC US US US US US
Fischer speaks on financial stability and monetary policy Industrial production - % mom GDP - % qoq GDP - % qoq GDP - % qoq GDP - % qoq Retail sales - % mom Prod. prices index - % mom Prod. prices index excl food and energy - % mom Business inventories - % mom Univ. of Michigan cons. confidence - index
Sep F 3Q P 3Q P 3Q P 3Q A Oct Oct Oct Sep Nov P
1.0 0.2 0.0 0.4 0.4 0.1 -0.5 -0.3 0.0 90.0
0.3 0.3 0.4 0.2 0.1 0.1 0.0 91.1
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
97.0
0.5 0.4 0.3 0.4 0.2
92.0