- Cautiously optimistic FOMC members see June rate hike as too early; September hike still on the cards
- ECB reported to give Greek banks more room on ELA
- Japan GDP growth stronger than expected, but inventories played a big role
Minutes show cautiously optimistic FOMC members
The FOMC minutes from the April meeting did not make major changes to the view communicated in the corresponding FOMC statement about the outlook for the US economy, unemployment and inflation despite the weak first quarter GDP growth. The minutes reinforced the ‘transitory factors’ affecting the slowdown that were already mentioned in the statement. As such, the forward looking view about the economy was unchanged. The April meeting was before the release of solid nonfarm payrolls and housing market data and a disappointing retail sales report, which together have been showing a mixed start for the second quarter. We expect firmer economic activity in the coming quarters.
Rate hike in September still on the cards
The minutes indicate that participants expressed different views about the likely timing and pace of rate hikes. A June rate hike is unlikely as most participants think that the economic conditions in June will still not be right for raising rates. We continue to expect a rate hike in September. A lot will obviously depend on whether the economy recovers convincingly after the weak first quarter.
ECB reported to have given Greek banks breathing space
The ECB’s Governing Council had a non-monetary meeting on Wednesday. Leaks suggested that it had given Greek banks more breathing space by giving more room to the Bank of Greece to provide ELA. Sources reported by Market News International said that Greek banks would be allowed to use EUR 6bn more in collateral for ELA. Meanwhile, sources told Bloomberg News that the Bank of Greece had requested an increase in the ELA ceiling of EUR 1.1bn, which would take it to EUR 81.1bn. This would be the same increase as was granted last week. This compares to actual borrowing of EUR 74bn. Greek banks have enough collateral to borrow around an extra EUR 20bn assuming the ceiling would be allowed to rise. This means that theoretically, have several more months of room assuming deposit withdrawal does not significantly quicken. On the other hand, the government is facing a more acute liquidity crunch, and could be facing real difficulties without fresh funds within the next two weeks.
Japan GDP growth strong, inventory largest contributor
First quarter GDP grew at an annualized pace of 2.4% up from 1.1% the previous quarter. The report showed a steady contribution of consumption to growth, which was unchanged at 0.9 ppts. Meanwhile business investment was for the first time in a year a positive contributor to growth (0.1%). It was, however, the build-up in inventories that lifted the economy above expectations. Net exports’ contribution was down 0.7 ppts. Inventories contributed 2ppts to GDP growth after shaving off 1.1ppts in the fourth quarter. We think the large positive contribution from inventory has negative implications for GDP growth in the second quarter.
Firmer consumption ahead and monetary stimulus
Recovery in momentum of domestic demand remains weak, but we expect consumption to support the economy in the coming time. Indeed, the rise in disposable income resulting from lower oil prices and higher real wages should bring about firmer consumption growth. We also expect additional monetary easing in July, but there are risks that this could be announced earlier if the economy does not show more meaningful signs of recovery.