Global Daily – Fed…the beginning of the end?

by: Maritza Cabezas , Aline Schuiling

Global-Daily-Insight-29-October-2014.pdf ()
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  • FOMC to end asset purchase programme, but maintain the “considerable time” forward guidance
  • US capital goods order unexpectedly weak, but consumer confidence surges
  • France tries to sneak past the EU’s budget check by announcing a minimal amount of extra austerity

FOMC will likely end its asset purchase programme…

We think that the FOMC will announce the end of its asset purchase programme following its meeting today. This is likely despite the recent market volatility and the suggestion of member James Bullard that QE could be extended past the October meeting. We think that US data has been generally solid with a few exceptions. Granted, September’s retail sales and core capital goods orders, a proxy for business spending, were unexpectedly soft (please see below). However, related manufacturing and consumer surveys have been strong. This leads us to think that the weakness of these reports is temporary. Moreover, with respect to the uncertainties surrounding the global economy, FOMC members will likely express concerns in this meeting, but we don’t expect them to revise the US economic outlook. Crucially, the labour market has continued to strengthen, with slack waning.

 

…and maintain “considerable time” phrase

We think the Fed will maintain its ‘considerable time’ phrase in its forward guidance suggesting rate rises are still some way off despite the end of QE. Although a number of officials want to drop this term, as it gives the impression policy is calendar-based, we think that the September minutes indicate that it is data dependent, while there was no alternative. Moreover, investors are sensitive to this phrase and any change in the wording could be misinterpreted by markets. Our base case is that the Fed will start to raise interest rates in mid-2015.

 

Weak durables, but strong US consumer confidence

The US data released yesterday were mixed. The September capital goods orders report was disappointing. This was in contrast to earlier released manufacturing surveys, which were strong. Headline durable goods orders, which include commercial aircraft, fell to -1.3%, as a result of a fall in commercial aircraft orders (-16%). The less volatile and more closely watched core capital goods ex-aircraft, which is a proxy for business spending plans, declined 1.7% mom in September from 0.3% the previous month. Meanwhile, the Conference Board’s consumer confidence indicator surged in October (up 5.5 pts). Forward looking expectations accounted for the largest improvement (up 8.6 pts). Consumer sentiment was likely supported by lower gasoline prices, which translates into higher disposable income, which will boost spending. .

France tries to sneak past the EU’s budget check

Today, the European Commission will probably decide whether France’s government budget for 2015 seriously violates the EU’s fiscal rules. According to the requirement of the Commission, France had to reduce its budget deficit to 3% of GDP next year, from an estimated 4.4% this year. However, the initial budget plan presented by the government in early October, merely aimed at a reduction to 4.3%. In its budget, the government planned to reduce the structural budget deficit by only 0.2 percentage points in 2015, whereas the EC had instructed it to implement austerity measures of 0.8 pps. In order to placate its European  partners, the French government on Monday presented extra fiscal consolidation measures to the amount of EUR 3.6bn (some 0.2% of GDP). These will mainly consist of reductions in interest payments and the contribution to the EU budget, while tax income should apparently rise due to the fight against tax evasion. According to the French government, the new measures should ensure that the structural deficit declines by 0.5 pps next year. Combined with an ongoing, albeit timid, economic reform programme, this could very well be just about enough to get the Commission’s approval. All three main rating agencies have placed France on a negative outlook, motivated by its deteriorating budgetary position, combined with subdued economic growth prospects. We do not think that the rather modest new measures announced by the government will be sufficient to change this any time soon.