Macro Weekly – Data moving our way

by: Han de Jong

Macro-Weekly_Data-moving_12-June-2015.pdf (60 KB)

Recent economic data has been more in line with our views on the global business cycle than in the last couple of months. US and Chinese data in particularly have started to improve. Japanese data is also firming while the eurozone economy continues to do nicely. The implication is that we can feel more confident that the Fed will hike rates in September, as we have been forecasting for some time.



Our (and your) patience and confidence in our view on how the business cycle in the main economies would develop in the course of the year has been tested in recent months. The optimistic view has been challenged, especially in the US where economic data has consistently undershot expectations since the beginning of the year. Fears over developments in China have also risen as the growth slowdown continued. And with the US and China disappointing, it looked only a matter of time for the eurozone recovery to be impacted and for us to be forced into sharp negative adjustments to our view on the global economy.


Recent data has come as a relief. In the previous week, US auto sales and the US employment report already were strong. During the last couple of days a few more indicators have supported our optimism. Confidence among small businesses rose convincingly in May. This indicator had refused to improve much during the 2010-2013 period. It suggested that growth in the US economy was vulnerable as it was not spreading to small businesses, a crucial ingredient in the economy. But an improvement started in 2014. The trend was reversed during the first couple of months of this year, but the April and May readings have been better than expected and the rising trend is now back in place.

Arguably more importantly, US retail sales improved sharply in May. Disappointing consumer spending had been a key element in a negative narrative. Despite improving incomes and increasing spending power due to lower fuel prices, the consumer ‘did not spend’. The key explanation offered by commentators was that households used the extra spending power to reduce debt levels. Not a bad thing in itself, but not good for spending and growth in the short term. The May data showed retail sales were up 1.2% mom (April revised from 0.0% to +0.2). Excluding auto and gas, sales were up 0.7% mom. Of course, one data point does not make a trend, but we are encouraged. To me, this improvement makes sense. We must bear in mind that retail sales can be volatile in the short term and hard to explain swings regularly occur. It is better to look at the trend and at the factors driving sales. These factors continue to be positive. Indeed, various labour market statistics released in recent days point to continued strength. The preliminary June reading on the University of Michigan’s index of consumer sentiment also showed a significant improvement.

We have long taken the view that the Fed would start raising rates in September. This is not an easy call. There are a lot of uncertainties around the tightening process. I compare it to a journey the Fed is going to take. But many things are unclear. What is clear is that they cannot stay where they are forever. The direction of their journey is also unambiguous: rates must go up. Unfortunately, it is unclear where exactly they need to go to and when exactly they need to arrive. They only other thing that looks certain is that they cannot travel very fast. In such a situation deciding on when to start the journey is a bit of a guess. Indeed, it seems that the FOMC is divided on the issue. However, the key people on the FOMC seem determined to start the journey within the next couple of months. And they have given guidance to that effect.

A rate hike would be the first in almost ten years. If markets are unprepared for the start of the tightening cycle, a first move could lead to shocks on financial markets. This is, obviously, undesirable. That is why guidance is perhaps even more important now than normally is the case. As the key FOMC members have given guidance trying to prepare us for a rate hike soon, it would be a mistake not to hike as that would cast doubt over the value of their guidance. The obvious thing that could stop the Fed from raising rates in the near future would have been an unexpected and persistent slowing of economic growth. That is why recent positive data has probably been received with much relief by the Fed. Indeed, our confidence has increased that a first step in a process of monetary tightening will be made in September.

Greece, German IP and labour costs

Important eurozone economic data has been scarce in recent days. Industrial production in Germany strengthened significantly in April: +0.9% mom, a welcome improvement after a number of soft months. It must be said, though, that production in France fell as much as it rose in Germany and production in the eurozone as a whole increased by a meagre 0.1% mom. On a more positive note, the business confidence indicator of the Banque de France rose in May, its third successive increase, suggesting that production growth in France should pick up.


German labour costs are on the rise. They rose 1.1% qoq in Q1 and 3.2% yoy. That is good news for two reasons. First, it indicates accelerating wage growth, which will support consumer spending growth. Second, it will add to inflation pressures in Germany. That is welcome as it will allow other countries to improve competitiveness vis-à-vis Germany without having to get stuck in sustained deflation. Recent wage settlements in Germany suggest that the mild acceleration in wage cost increases will continue.

The Greek saga is continuing. I have no idea whatsoever if any progress is made. Someone I spoke to this week made an interesting observation. He said that both sides have dug themselves so deep into the trenches that neither side can compromise. The solution then is to let the situation explode before the dust can settle. In particular he argued that the Greek government cannot go home with any deal as they will, no matter what, be criticised by their extremist supporters for not having achieved enough. He suggested that the ECB should cut off Greek banks from liquidity support. That would result in ATMs no longer giving out euro notes. The uncertainty and chaos would then lead to a quick decision on either to accept a deal with the partners or leave the euro. As soon as a deal is signed, the liquidity problem can be resolved quickly. I should hope it does not happen like this, but one cannot be particularly optimistic.

Other countries too

Japanese data has recently also improved. Corporate profits have been strengthening for some time. This has started to feed through into higher wages. Higher wages, in turn, are essential in supporting consumer spending. Japanese Q1 GDP growth was revised from 0.6% qoq to 1.0%, well ahead of the US (-0.7%) and the eurozone (+0.4%).

Chinese data also provided some reason to smile. Economic growth has slowed for a while and many commentators have been suggesting that policymakers are letting growth slip through their fingers. It has been clear that policymakers have tried to balance maintaining a reasonable pace of economic growth, while addressing vulnerabilities in a number of key areas (real estate, the financial sector, environmental problems and corruption). This has been a tricky process as measures to prop up growth threaten to make the targets in the other areas less achievable. That is why small targeted measures have been taken. Until recently, the declining trend in growth indicators continued. But recent data shows an improvement. Hiring by firms appears to be strengthening, as have retail sales and industrial production growth.