Will Yellen testimony Tuesday 24 confirm our reading of the minutes?

Genevieve Signoret

Macro Views

Next week in brief

Janet Yellen’s starts her testimony before Congress on Tuesday 24 and finishes Wednesday 25. Her words have huge potential to move markets. Our reading of minutes of the January 27–28 FOMC meeting released last week is that the FOMC’s faith in its own previous forecast that it will hike rates already in June has been shaken (see the next paragraph for details). We’ll listen for confirmation or refutation of this reading of the minutes on Tuesday–Wednesday.

Review of last week

Policy

The Fed minutes didn’t change our view, which was that the first rate hike will come in the second half of 2015, not in June. As Genevieve explains in today’s Letter from the President, we read evidence that FOMC discussions are moving in the direction of postponing the start of interest rates normalization to beyond June 2015. That is, the Fed itself is now questioning its own forecast of its future decisions.

Banxico revised down by 50bp its GDP growth forecast for 2015 and by 30bp 2016’s in its last Quarterly Inflation Report. Now the Bank forecasts 2.5%–3.5% for 2016 and 2.9%–3.9% for 2016. Banxico praised the recent government spending cut while citing external factors, a lower oil output, and internal demand weakness as causes for their having downwardly revised their growth outlook. The Bank changed its inflation forecast little: it still sees headline inflation rates near 3% in 2015 and 2016.

Inflation in the UK continued to slowdown in January. In January, consumer prices were up 0.3% from a year earlier. Last week, in the Bank’s quarterly inflation report, Governor Carney said he expected inflation to continue slowing down during 2015, and that “the MPC can do little to offset the effects of recent falls in energy and food prices on headline inflation.”

The minutes of the last monetary policy meeting of the Bank of England showed that, for the second time in a row, in its 5 February meeting, the MPC had produced a unanimous decision—namely, to leave unchanged the monetary policy rate at 0.50% and the Bank’s asset purchase program at £375Bn.

Politics

Negotiations between the euro area’s finance ministers and the Greek government finally produced an agreement last Friday. The deal commits the Greek government to complete the previous program. The agreement is unclear as to what new reforms will be implemented by the Greek government. On Monday, the agreement will be reviewed by the International Monetary Fund (IMF) and EU institutions. If it is rejected, a new Eurogroup meeting will be held on Thursday. Don’t miss our briefer on Greece in Timón Económico.

The ceasefire didn’t stop the fighting in the Ukraine. Battles continued in south eastern Ukraine. The Ukrainian government had to surrender the contested town of Dobaltseve. Kiev has accused Russia of sending more tanks and troops to the rebels.

After the release of a video showing the beheading of 21 Egyptian Christians by jihadists affiliated to the so called Islamic State (ISIL), Egypt has attacked what they said were weapon stores and training facilities operated by ISIL in Libya. The pentagon detailed a new plan to recover Mosul, currently in control of ISIL.

Activity

In Q4 2014, Mexico’s GDP accelerated to 2.7% saar from 2.1% in Q3. Over the year, the Mexican GDP grew 2.1%, just as we had forecast.

While U.S. mining activity slowed down in January, manufacturing accelerated, enough, in fact, to cause overall industrial production to continue its accelerating trend. IP accelerated to 4.8% y/y in January from 4.4% the previous month. Mining slowed down to 8.5% y/y from 10.7% the previous month while manufacturing accelerated to 6.0% y/y from 4.6% last December. This is excellent news.

Next week in detail

Events in red are those most likely to shake markets.

During the week

• Greece: Debt negotiations. See comments above.

Monday 23

• Japan: Monetary policy meeting minutes (Jan 20–21). In this meeting, the Bank of Japan left unchanged its monetary policy rate and its asset purchase program and revised down their projections for inflation and growth in 2015.
• Mexico: Retail sales (Dec).

Tuesday 24

• Euro Area: Consumer prices (Jan, final), ECB speech: Draghi.
• Turkey: Monetary policy meeting. President Erdogan has been pushing the Central Bank of Turkey to ease further. The lira and inflation rates both are falling, but growth remain subdued. Consensus: -50bp to 7.0%.
• USA: Yellen testimony (through Wednesday 25). S&P/Schiller house price index, consumer confidence.  In in Janet Yellen’s congressional testimony, we’ll listen for confirmation or refutation of our reading of the minutes (see comments above and in this week’s edition of Genevieve’s Letter from the President).
• Mexico: Consumer prices (1H Feb).

Wednesday 25

• Euro Area: Draghi testimony in Brussels. President Draghi will deliver the ECB’s annual report. He’s expected to detail the bank’s QE plans.

Thursday 26

• Japan: Unemployment rate (Jan).
• Euro Area: Money supply (Jan).
• USA: Unemployment claims (21 Feb), consumer prices (Jan), durable goods new orders (Jan), FHFA house prices. We know that falling commodity prices are pushing headline inflation down. But will the core trend down too? Consensus: headline, –0.1% y/y (from 0.8% in Jan); core, unchanged at 1.6% y/y.
• Brazil: Unemployment rate (Jan).
• Mexico: International trade (Jan).

Friday 27

• Japan: Consumer prices (Jan), unemployment rate (Jan), industrial production (Jan, flash). We expect consumer prices—even the core— to fall further before starting to recover. Consensus: unchanged from December at 2.4%..
• USA: GDP (Q4, second estimate), Michigan consumer prices (Feb). After a trade report that showed a widening trade deficit, we expect a downward revision. Consensus: 2.0% q/q  saar (from 2.6% in the first estimate).
• UK: GDP (Q4, second estimate).
• Mexico: Unemployment rate (Jan).