Macro Weekly Will the Fed shift?

Macro Weekly
Will the Fed shift?
Group Economics
Macro Research
Nick Kounis +31 20 343 5616
14 September 2014
The coming week will see three big events. The FOMC meets and its projection for US interest rates for next year could move
up a bit further. However, we expect the Fed to stick to its overall guidance that rates will remain low for a ‘considerable
period’. In the eurozone, the ECB will conduct the first TLTRO operation. It seems likely that the take-up will eventually be
large, but banks may wait until the December one. In addition, Scotland votes in a referendum on independence, which will be
a close call. A vote in favour will likely mean uncertainty in the near term, which will be negative for the UK economy and
sterling for a time. Meanwhile, last week’s data were positive, suggesting the eurozone returned to growth in Q3.
All eyes will be on the Fed
Watching the dots and the guidance
The FOMC meets in the coming week. These meetings are
Three elements will be watched particularly carefully. The first
usually big events, but this one will be particularly closely
is the projections of individual FOMC members, which are
watched. The minutes of the last meeting suggested that a
published once a quarter. There is a particular focus on their
number of Committee members feel that interest rates may
expectations for future short-term interest rates, which are
need to rise somewhat earlier than they are currently signalling
displayed in a dot chart. The last projections, published in June
if the trends seen in the economy and labour market persist
showed that officials expected a median target for the fed
going forward. Even Fed Chair Janet Yellen sounded a little
funds rate of 1.1% at the end of next year. Given the recent
more open to raising interest rates earlier in the face of better
remarks from officials, the dots could well creep up a bit
economic data. Finally, last week, researchers from the San
further, to signal a somewhat higher expectation for the fed
Francisco Fed published a paper suggesting that financial
funds rate. The second element is the forward guidance in the
markets were expecting ‘a more accommodative policy than
FOMC statement. In recent times, the Fed has asserted that it
FOMC participants’. Against this background, financial markets
would be ‘appropriate to maintain the current target range for
have started to price in higher short-term interest rates in the
the federal funds rate for a considerable time after the asset
US for next year. According for futures markets, the fed funds
purchase program ends’. The Fed is likely to taper its asset
rate is now expected to rise to 0.8% by December. This
purchases again at the September meeting (to a monthly pace
compares to lows of around 0.65% in the middle of August.
of USD 15bn from USD 25bn) and end the programme
This means investors now expect a little more than 50bp of
altogether in October. What a ‘considerable time’ after that
policy rate increases next year, which is still below the
means, is anyone’s guess. There has been some discussion
guidance of the Fed (see below).
among Fed officials that the guidance should change to be
made ‘data dependent’. However, we do not expect this at this
US fed funds rate expectations
meeting. The latest month of the broad range of labour market
data the Fed watches has shown little progress. This might be
Implied from futures, %
1.6
due to special factors, but we think it is probably too early for
1.4
the Fed to make a major shift in its communication. The final
1.2
element to watch will be Fed Chair Yellen’s remarks during the
1.0
press conference. We expect a relatively balanced approach.
0.8
Exit like to be at a pace that suits the economy
0.6
Our base case is that the Fed will raise rates in June of next
0.4
0.2
Jan-13
year, and raise interest rates in small steps at each
May-13
Sep-13
June-15
Jan-14
May-14
December-15
Sep-14
subsequent FOMC meeting in 2015. With inflation under
control, the Fed can afford to raise interest rates at a pace
consistent with the economy continuing to grow at a healthy
Source: Bloomberg
pace. Signs that less accommodative monetary policy is
threatening economic growth would see an adjustment in the
pace of rate of hikes. As such, we do not see the Fed’s exit as
a threat. During past rate hike cycles, economic growth and
the performance of growth-related assets has remained
2
Macro Weekly - Will the Fed shift? - 14 September 2014
positive on average. We see no reason to think this time will be
Economic data last week generally positive
different.
Turning back to recent economic reports, these were generally
rather encouraging. In the eurozone, there were signs that
Q2’s flat GDP reading was not the beginning of a trend, but
TLTRO take-up could start slowly
The other big event next week will be the first of the ECB’s
rather that a moderate recovery is continuing. Industrial
TLTROs in which it will lend money to banks for up to 4-years.
production jumped by 1% mom in July, up from a 0.3% decline
The maximum take-up in the September and December
in June. A stronger global economy and the fall in the euro
TLTROs is around EUR 400bn, while the central bank has
should underpin growth in the eurozone industrial sector in the
indicated that taking all eight operations together, there could
coming months. Meanwhile, employment rose by 0.2% qoq in
be a take-up of a trillion euro. There probably will be ample
the second quarter, up from a 0.1% gain in the first. In the US,
demand. The cost of the operations compared to other sources
the story of continued strong economic growth was underlined
of funding is favourable for banks. However, it is conceivable
by an upbeat retail sales report. Retail sales were up by 0.6%
that banks will start relatively slowly, with the bulk of the early
mom in August, while the July number was revised up to 0.3%
take-up coming in December. Banks that are still using LTRO
from 0% previously. It was particularly encouraging that the
funds will hang on to them a little longer as they are cheaper. A
growth in sales did not rely on volatile auto or gas sales, with
reasonable assumption for September borrowing is EUR
the core measures also strong. US households are benefiting
100bn. Although the TLTROs on their own will not make the
from an improving labour market and strong balance sheets.
difference for the outlook for bank lending, they are part of a
comprehensive package of measures by the ECB, including
Eurozone employment growth
the comprehensive assessment of banks and the covered
% qoq
bond and ABS purchase programme. All these measures
together are starting to look formidable. In addition, demand for
bank loans is starting to recover. We expect a gradual
recovery in eurozone bank lending in the coming quarters.
(please also see our Fixed Income Watch publication: ‘TLTRO:
bazooka or peashooter’, for more).
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
Scotland takes centre stage
The final big event of the week will be Scotland’s vote in the
referendum on independence from the UK. Last weekend, an
opinion
poll
showed
that
the
Yes
vote
for
-0.6
-0.8
-1.0
98
00
Scottish
independence had taken the lead. However, towards the end
of last week, the polls turned to show that the No campaign
once again had the upper hand. Either way, it looks to be a
close call. A Yes vote could lead to a sterling currency area
break-up as the UK government has ruled out a currency union
with an independent Scotland. This in turn raises questions
about the division of assets and liabilities and the possible redomination of the balance sheets of Scottish entities. In the
case of a Yes vote, the two governments have pledged to work
constructively together to reach separation agreements, while
the BoE has prepared a contingency plan to ensure financial
stability in the interim period. Nevertheless, the uncertainty
would likely hit investment and trade, especially in Scotland
itself, which makes up around 8% of the UK economy. Sterling
would likely fall significantly as markets scaled back BoE rate
hike expectations and factored in a significant risk premium.
Source: Bloomberg
02
04
06
08
10
12
14
3
Macro Weekly - Will the Fed shift? - 14 September 2014
Main economic/financial forecasts
GDP grow th (%)
2012
2013
2014e
2015e
+3M
+12M
2014e
2.3
2.2
2.2
3.8
United States
0.23
0.23
0.3
1.3
0.3
1.7
-0.6
-0.4
0.9
1.7
Eurozone
0.15
0.09
0.0
0.0
0.0
0.0
Japan
1.5
1.5
1.5
1.4
Japan
0.21
0.21
0.0
0.0
0.2
0.2
United Kingdom
0.3
1.7
3.0
2.8
United Kingdom
0.56
0.56
1.0
1.8
1.0
2.2
China
04/09/2014 11/09/2014
2015e
United States
Eurozone
3M interbank rate
04/09/2014 11/09/2014
2015e
7.7
7.7
7.5
7.0
World
Inflation (%)
3.2
2012
3.2
2013
3.3
2014e
3.9
2015e
+3M
+12M
2014e
United States
2.1
1.5
2.0
2.2
US Treasury
2.45
2.55
2.6
3.1
2.6
3.3
Eurozone
2.5
1.3
0.5
1.0
German Bund
0.97
1.05
1.0
1.4
1.0
1.6
Japan
0.0
0.3
2.5
1.7
Euro sw ap rate
1.17
1.21
1.2
1.6
1.2
1.8
United Kingdom
2.8
2.6
1.6
1.7
Japanese gov. bonds
0.51
0.55
0.0
0.0
0.5
1.1
China
2.7
2.6
2.4
2.8
UK gilts
2.50
2.50
2.6
3.1
2.6
3.2
World
Key policy rate
4.1
11/09/2014
4.0
+3M
4.0
2014e
3.9
2015e
04/09/2014 11/09/2014
+3M
+12M
2014e
2015e
Federal Reserve
0.25
0.25
0.25
1.50
EUR/USD
1.30
1.29
1.28
1.20
1.28
1.20
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
105.3
107.1
0
0
110
120
Bank of Japan
0.10
0.00
0.10
0.10
GBP/USD
1.64
1.62
1.62
1.56
1.62
1.60
Bank of England
0.50
0.75
0.75
2.00
EUR/GBP
0.79
0.80
0.79
0.77
0.79
0.75
People's Bank of China
6.00
6.00
6.00
6.00
USD/CNY
6.14
6.13
6.10
6.20
6.10
6.20
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
Find out more about Group Economics at: http://insights.abnamro.nl/en/category/economy/
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 2014 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").
4
Macro Weekly - Will the Fed shift? - 14 September 2014
WEEKLY ECONOMIC CALENDAR
Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Monday
Monday
15/09/2014
15/09/2014
14:30:00
15:15:00
US
US
Empire State PMI - Manuf. general business conditions - index
Industrial production - % mom
Sep
Aug
14.7
0.4
14.4
0.2
Tuesday
Tuesday
16/09/2014
16/09/2014
10:30:00
11:00:00
GB
DE
CPI - % yoy
ZEW index (expectation economic growth)
Aug
Sep
1.6
8.6
5
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
17/09/2014
17/09/2014
17/09/2014
17/09/2014
17/09/2014
17/09/2014
17/09/2014
17/09/2014
17/09/2014
17/09/2014
10:30:00
10:30:00
11:00:00
14:30:00
14:30:00
14:30:00
14:30:00
16:00:00
20:00:00
20:00:00
GB
GB
EC
US
US
US
US
US
US
US
Claimant count unemployment rate - %
Change in claimant count - thousands
Core inflation - % yoy
Inflation excl food and energy - % mom
Inflation excl food and energy - % yoy
Inflation (CPI) - % mom
Inflation (CPI) - % yoy
NAHB home builders' confidence index
Policy rate - %
Fed Asset Purchases - USD bn per month
Aug
Aug
Aug F
Aug
Aug
Aug
Aug
Sep
Sep
Sep
3.0
-33.6
0.9
0.1
1.9
0.1
2.0
55.0
0.25
25
0.9
0.2
1.9
0.0
2.0
56.0
0.25
15
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
18/09/2014
18/09/2014
18/09/2014
18/09/2014
18/09/2014
18/09/2014
18/09/2014
18/09/2014
18/09/2014
18/09/2014
09:30:00
09:30:00
09:30:00
10:00:00
10:30:00
11:15:00
14:30:00
16:00:00
GB
NL
NL
CH
NO
GB
EC
US
US
HK
Scotland's independence referendum
Unemployment - %
Consumer confidence - index
Policy rate - %
Policy rate - %
Retail sales - % mom
Allotment 1st ECB TLTRO - EUR bn
Housing starts - % mom
Philadelphia Fed - business confidence - index
Composite interest rate - %
Aug
Sep
Sep 18
Sep 18
Aug
8.2
-6
0.0
1.5
0.1
Aug
Sep
Aug
15.7
28.0
0.5
Friday
Friday
19/09/2014
19/09/2014
14:30:00
14:30:00
CA
CA
CPI core - % yoy
CPI - % yoy
Aug
Aug
1.7
2.1
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
If you would like to receive this calendar by email on Friday, please send a message to
[email protected]
ABN AMRO
15
0.0
1.9
0.0
2.0
0.25
15
8.2
-6
-4.2
22.2

Download Report