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Watch the Fed

Genevieve Signoret

16 March 2015

Macro Views

This week

We expect the FOMC to drop the “patient” phrase in the communiqué. However, we don’t think this necessarily implies a rate hike in June. We think the Fed will probably start normalizing in the second half of the year but see a large risk that it will do so in June.

Last week

Politics

Forty-seven Senate Republicans sent an open letter to Iran claiming that any deal reached by Iran with Washington could be revoked by Congress. This week, nuclear talks will continue.

Vladimir Putin hadn’t attended public events since 5 March. The Kremlin cancelled all the public appearances of the President last week. Speculation has soared: a new baby, disease, or even a palace coup are on the table. President Putin made a short appearance on Monday.

Policy

The European Central Bank (ECB) started buying sovereign bonds. The ECB bought €10Bn in the first three days of its extended QE program. Yields—which move in the opposite direction to prices—went ultra-low. The 5-year German bond dipped into negative territory while the 10-year Bund was down to 0.26% from 0.35% a week earlier. The euro closed on Friday at $1.00=€1.05, its weakest level against the dollar since 2003. We forecast parity for end 2015. We anticipate these recent developments will allow the euro area to avoid an outright deflationary spiral.

The Bank of Korea joined the currency war, cutting its monetary policy rate by 25bp to 1.75%. The rate cut comes one week after the People’s Bank of China (PBoC) loosened its monetary policy amid what looks like a rush to ease by central banks in Europe and Asia before the Fed starts to normalize policy.

Activity

U.S. retail sales disappointed yet again. Core retail sales slowed down 0.3% a year from 1.5% the month before. The headline number disappointed too: it decelerated to 1.1% from 3.3% in January. We expect now a slower PCE in Q1.

Chinese economic activity slowed down further in the first two months of the year. Industrial production slowed down to 6.8% a year from 7.9% in December. Fixed asset investment decelerated to 13.9% from 15.7% in the last month of 2014. Given the weak start of the Chinese economy in 2015, we should expect further easing from the PBoC.

Mexican industrial production started the year on a weak note. Industrial production slowed down to 0.3% year on year from 3.0% the previous month. Mining continued to contract albeit at a slower pace. Manufacturing and construction slowed down. And energy, water, and gas accelerated slightly. We’ll be attentive to the IGAE—which includes services—coming on March 25 to further assess the Mexican economy’s performance in the first month of the year.

Stepping back

Four times a year we pause this blog for two weeks to undertake projects. We’re currently taking such a pause. To keep yourself up-to-date on our most recent views don’t forget to follow @gsignoret and @TransEconomics on Twitter. We’ll resume publishing on 6 April 2015.

See you then!

The next 3 weeks: the details

Events in red are those most likely to shake markets.

During the week

  • Switzerland: Iran nuclear talks.

Tuesday 17

  • Japan: Trade balance (Feb).
  • Turkey: Monetary policy meeting. After the surprising cut in its last meeting we do not expect a change. Nevertheless, increasing pressure from the government for further cuts boosts uncertainty. Consensus: no change at 7.25%.
  • Euro Area: Consumer prices (Feb, final).

Wednesday 18

  • Japan: Trade balance (Feb).
  • Euro Area: Trade balance (Jan).
  • UK: Monetary policy meeting minutes, unemployment rate (Feb). In its last meeting the MPC left unchanged its monetary policy stance. The monetary policy rate stayed at 0.5% and the asset purchase program at £375Bn. From the minutes we’ll learn whether the recently achieved consensus endured or not.
  • USA: Monetary policy meeting and press conference. We expect the FOMC to drop the “patient” phrase in the communiqué. However, we don’t think this necessarily implies a rate hike in June. We think that the Fed will probably start normalizing in the second half of the year but see a large risk that it will do so in June. Consensus: monetary policy rate unchanged at 0.00–0.25%.

Thursday 19

  • USA: Unemployment claims.

Friday 20

  • USA: Fed speech: Lockhart and Evans (FOMC voters).
  • Brazil: Consumer prices (Mar).
  • Mexico: Retail sales (Jan).

Tuesday 24

  • Global: Market PMIs (Jan), Iran nuclear talks deadline.
  • UK: Consumer prices (Feb).
  • USA: Consumer prices (Feb).

Wednesday 25

  • USA: Durable goods orders (Feb).

Thursday 26

  • Mexico: Monetary policy meeting.

Friday 27

  • Japan: Consumer prices (Feb), unemployment rate (Feb).
  • USA: GDP (4Q, final), U. Michigan consumer sentiment.

Monday 30

  • Japan: Industrial production (Feb).
  • USA: Personal consumption expenditures (Feb), PCE inflation (Feb).

Tuesday 31

  • Korea: Industrial production (Feb)
  • Turkey: International trade (Feb), GDP (4Q).
  • Euro Area: Consumer prices (Mar, flash).
  • UK: GDP (4Q, final).
  • USA: S&P/Case-Schiller house price index (Jan), consumer confidence (Mar).

Wednesday 1 April

  • Global: Markit PMIs (Mar).
  • China: NBS PMI.
  • Mexico: Gross fixed investment (Jan), remittances (Feb), IMEF PMI (Mar).

Thursday 2

  • USA: Unemployment claims.

Friday 3

  • Turkey: Consumer prices (Mar).
  • USA: Non-farm payrolls, unemployment rate (Mar). Markets are closed.
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