- The speeches of the Fed Chair and ECB President top the bill at Jackson Hole today
- Both should stick to their stance, though risks are tilted to a less dovish Yellen but more dovish Draghi
- Eurozone PMIs decline in August, but still consistent with moderate recovery
Yellen unlikely to change view on labour market
Fed Chair Janet Yellen will give a speech today at the annual Jackson Hole symposium, which will focus this year on labour market dynamics. We expect the Fed Chair’s message concerning the slack in the labour market to remain unchanged, highlighting that the weakness continues to be cyclical. Ms Yellen approaches the labour market using a dashboard of indicators that aims to assess the slack in the labour market from a broad perspective. She considers that some indicators, including the participation rate, the employment rate and long-term unemployment remain at unsatisfactory levels. This implies that interest rate increases are a long way off. If she sticks to her view, the market impact will not be significant as far as the monetary policy backdrop is concerned. Financial markets have scaled back hike expectations for 2015 considerably. However, there is a risk that her speech is a bit less dovish. In the July FOMC minutes released this week, members stated that ‘labour market conditions had improved more in recent months than they had anticipated earlier’. Although we think that Ms Yellen will change her stance over the next few months and become less dovish, we think the Jackson Hole Symposium comes too soon. We expect the first rate hike in June 2015 (Please see our recent US Watch for more on Jackson Hole).
ECB President to stick to scenario, but emphasise risks
ECB President Mario Draghi will also speak at Jackson Hole, but somewhat later in the programme. He is likely to broadly repeat the message he gave following the Governing Council meeting of 7 August, and signal that the ECB is in wait-and-see mode. He will probably mention that the moderate and uneven recovery of the eurozone economy is expected to continue, but that the risks to the outlook remain to the downside, while geopolitical risks having increased. Moreover, Mr Draghi is expected to mention that inflation will remain at low levels in coming months, before increasing gradually during 2015 and 2016. Finally, he could also repeat his efforts to talk the euro lower, emphasizing that market fundamentals for a weaker euro are much better and that real interest rates will remain negative in the eurozone for a much longer time than elsewhere. Given recent weak data, there is a chance that he might sound a bit more dovish than he has done up until now.
Euro PMI declines, but consistent with moderate recovery
The composite PMI for the eurozone declined to 52.8 in August from 53.8 in July, which was lower than the consensus forecast of 53.4. However, the level of the index remains at decent levels consistent with GDP growth of around 0.3% qoq in the third quarter. This compares to the flat reading we saw in the actual GDP number in Q2, which looks to have overstated the weakness of the economy. The drop in the PMI in August takes the index back to June’s level and during this year so far, the index has been trending in a range of just below 53 and 54, consistent with a moderate economic recovery.
The drop in the survey was more marked for manufacturing than for services and the PMI for the sectors point to a diverging picture. The manufacturing PMI is now at 50.8, while services is up at 53.5. The weakness in manufacturing might reflect some concern among exporters about the potential fall-out from the Ukraine crisis. In addition, the past strength of the euro may still be impacting exports. However, we expect both those factors to fade going forward. Meanwhile, domestic drags are waning, with financial conditions easing and the labour market gradually improving. The falls in food and energy prices are also good news for purchasing power. Overall, we expect a moderate recovery to continue. Still, given the poor second quarter GDP number, the ECB’s GDP growth forecast of 1% could well be modestly revised down.