Global Daily – No slip of the tongue

by: Peter de Bruin , Aline Schuiling

140326-Global-Daily-Insight.pdf ()
  • Fed’s Plosser: Yellen’s six months comment was no slip of the tongue
  • US consumer confidence reaches highest level since January 2008
  • Germany’s Ifo declines, while business confidence in France and the Netherlands rises

Fed’s Plosser: Yellen made no mistake

It is worth closely following various FOMC members’ speeches and comments, after the eventful FOMC meeting last week. Yesterday, Philadelphia Federal Reserve Bank Charles Plosser was on the roll. Interestingly, the Philadelphia Federal Reserve President said that Fed Chair Janet Yellen did not make a ‘mistake’ when she said that interest rates could be raised six months after the end of the Fed’s asset purchase programmes. These will stop in October, given the current pace of tapering, suggesting that we could see the first rate hike already in April of next year. We already had our reservations about the ‘slip of the tongue’ argument, given Ms Yellen’s extensive experience at the Fed, and doubted that she had made a mistake during the press conference. Rather, we think that the Chairwoman deliberately intended to shape market expectations towards earlier rate hikes. For now, our base scenario remains that the Fed’s first move will come in June and that rates will be raised every subsequent meeting by 25bp to 1.5% at the end of the year. This is a somewhat faster pace of rate hikes than the 1% FOMC officials are currently pencilling in, and reflects that we see a stronger recovery than the Fed and hence a more marked decline in the unemployment rate. That said, Yellen’s and Plossers’ remarks suggest that the Fed could opt to raise rates a bit earlier, but start by increasing interest rates every other meeting in the beginning of the rate hike cycle. This would have the benefit that it gives market participants the impression that the Fed is in no hurry to tighten financial conditions too sharply and therefore would most likely have less of a market impact.

US consumer confidence rises to highest level since 2008

The Conference Board’s measure of consumer confidence rose sharply to 82.3 in March, up from 78.3 the month before, bringing it to the highest level since January of 2008. In our view, there are plenty of reasons for consumers to be optimistic. For starters, the pace of fiscal consolidation has eased sharply. Moreover, judging by the initial jobless claims series, the labour market recovery remains on track, and we expect to see a sharp pickup in hiring in March, once the effects of the winter weather dissipate. Finally, house prices continue to rise. Indeed, January’s FHFA House Price Index (+0.5% mom) and S&P Case Shiller’s Home Price index (+0.9% mom) both increased. Although the %3mo3m annualised rate of the latter softened a bit (to 10.3% from 11.2%), the inventory of existing homes remains tight, despite the softer sales pace recently. This implies that rising house prices will continue to underpin wealth effects for the foreseeable future. All this suggests that consumption growth is set to accelerate sharply in coming quarters.

Mixed business confidence indicators eurozone

Germany’s Ifo business climate indicator fell from 111.3 in February to 110.7 in March, ending a string of four consecutive monthly rises. Although the current conditions index rose, this was more than offset by a drop in the expectations index. The expectations index is the best tracker of GDP growth of the survey. Its present level, which still is well above its long-term average, indicates that GDP growth picked up somewhat in Q1, from the 0.4% qoq that was recorded in 2013 Q4. The details of the survey show that expectations in manufacturing fell significantly. This was probably due to the tensions in Ukraine, the strong euro and softer economic data from China and the US in the first months of this year (which we expect to be temporary). Meanwhile producer confidence in the Netherlands and business confidence in France both increased in March, albeit that they both came from a much lower level than Germany’s Ifo and currently are merely below (France) or close to (the Netherlands) their long-term average. The changes in confidence in France and the Netherlands underline that these economies are gaining momentum, but that they will not grow as fast as Germany this year.