- FOMC’s Dudley relatively optimistic about US economy going forward and hopeful for rate hike in 2015
- US consumers remain confident signalling consumption growth to rebound after weak start
- China lowers bank’s reserve requirements by 100 bp, following further economic weakening in Q1.
FOMC member Dudley remains optimistic on US economy
Fed policymaker William Dudley said yesterday at the Bloomberg Americas Monetary Summit in New York that “…hopefully the data will support a decision to lift off later this year”. Although he was relatively optimistic about the US economy, he mentioned that one of the conditions for a rate hike is to determine whether the softness in March’s labour market report is temporary. We think that the labour market report’s weakness was partly explained by the harsh weather conditions. Other labour market data released thereafter remain solid. Mr. Dudley also said that consumer spending is stacking up to rise, which should push inflation to the desired levels over time. We think that economic conditions will improve, mainly led by a rebound in consumption growth. Moreover, a firmer core CPI in March makes the case for a rate hike this year. We expect the lift off in September this year. According to the forecasts released last month, 14 of the 17 FOMC policymakers expect a rate hike this year.
US consumers confident, consumption growth to rebound
Consumption growth in the US has made a slow start to the year, despite impressive consumer confidence readings. Indeed, the recently released University of Michigan Consumer Confidence report suggest that consumer expectations are rising steadily, boding well for consumer spending. However, bad weather weighed heavily on consumer spending in the first quarter.
We think that consumption growth will pick up in the coming quarters. Indeed the conditions for stronger consumer spending remain favourable. A strong labour market and the decline in the gasoline prices has led to solid growth of disposable income. On top of this, capital gains on equity holdings have sharply raised the wealth of many households. For home owners, rising house prices have increased the value of their homes. Meanwhile, in the first quarter, commercial bank credit data show that consumer loans are gradually picking up and with even more momentum in the first weeks of April. This all suggests that consumption growth will rebound going forward.
Following further economic weakening in Q1 …
Slower economic growth in China is triggering a policy response. Economic growth fell to a six-year low of 7.0% yoy in Q1 (Q4-2014: 7.3% yoy). Over the quarter, growth fell to 1.3% qoq (Q4-2014: 1.5% qoq). March data for imports and exports and for industrial production, fixed investment and retail sales were also disappointing. Given that the authorities take their 2015 growth target of 7% seriously and remain committed to prevent a hard landing, these weak data were fully consistent with further stimulus (see our China Watch: Growth further down, but still ‘on target’ published last week).
… China lowered banks’ reserve requirements by 100 bp
And in fact, that is what happened last weekend. The PBoC decided to cut overall bank reserve requirements (RRRs) by another 100 bps, while RRRs for small rural institutions have been lowered by an extra 100 bps. These measures follow a 50 bp RRR cut in February and two 25 bp cuts in the main policy rate last November and February. Still, the latest RRR cut was the sharpest single cut since the global financial crisis and is expected to add around CNY 1.5tn in liquidity into China’s financial system. As the authorities have many tools at their disposal and there is still ample room, we expect them to continue with moderate monetary easing and targeted (fiscal) stimulus to keep economic growth on track to hit the target.