Global Daily – Fed doves show preferences

by: Maritza Cabezas , Arjen van Dijkhuizen , Aline Schuiling

Global-Daily-Insight-15-October-2015.pdf (58 KB)
  • Fed doves set scene for rate hike in 2016, while US consumers hold back in September
  • China trade data remain weak in annual terms, but monthly trade figures point to stabilisation/recovery
  • Eurozone industrial sector slows down





Fed doves set scene for rate hike in 2016

The uncertainty around the Fed rate hike is increasing. This week, two Fed board governors signaled their reservations for a rate hike this year, challenging Chair Yellen who had mentioned earlier that a rate hike this year was likely. Mr. Tarullo said that right now he didn’t expect it was appropriate to raise rates. Meanwhile, Ms. Brainard indicated that ‘the risks to the near term outlook for inflation appear to be tilted to the downside…’. On Sunday, Vice Chair Stanley Fischer showed a cautious tone, indicating that ‘…more time is needed to appraise recent developments in the global economy before beginning normalization of interest rates’. The influential President of the New York Fed, Bill Dudley, a voting member, will speak today about monetary policy. The tone of FOMC participants in upcoming interventions will be critical to assess any shifts on the timing of the first rate hike.


US consumers hold back in September

September’s US retail sales were below expectations. Retail sales increased by 0.1% after being flat the previous month. Meanwhile, core retail sales, which are more closely related to the consumer spending component of GDP declined by 0.1% after rising 0.2% in August. On the positive side, discretionary spending, including hobbies, restaurants and clothing remained strong though. We think that despite this soft report, that consumption growth will continue to have a favourable trajectory, mainly on the back of low gasoline prices and higher disposable income.


China trade data weak in annual, but less so in monthly terms

Last Tuesday, Chinese annual trade data looked weak. The contraction of imports deepened to -20.4% yoy in September (August: -13.8%), below market expectations. Exports contracted for the third month in a row (-3.7% yoy), but less than in previous months (July: -5.5%). However, if we look at monthly trade patterns, the emerging picture is less dark. Chinese imports fell sharply in January and February, but recovered in March (with volatility also reflecting the timing of the Chinese New Year) and have been quite stable since. It is clear that the sharp drop in early 2015 is still affecting the year-on-year numbers. This pattern is more or less valid for various trade partners, including the US, EU and Asia. Exports have even showed monthly gains since April. Meanwhile, Chinese inflation data show that there is further room for stimulus, in our view. After rising to a 12-month high of 2% yoy in August, headline inflation fell again to 1.6% yoy on the back of lower food price inflation.


Eurozone industrial production declines …

Industrial production in the eurozone declined in August. It fell by 0.5% mom in August, down from a 0.8% rise in July (revised higher from 0.6%). Compared to a year ago, total production increased by 0.9% (down from 1.7% in July). Despite this slowdown in overall growth, there was a marked rise in growth in production of capital goods (to 2.8% yoy from 1.7% in July) and durable consumer goods (to 4.5% from 1.6%), which underlines that domestic demand in the eurozone and its main export markets (the US and the UK) is expanding robustly.


… but overall GDP growth should be more resilient

Looking ahead, we think that the slowdown in China and emerging markets more generally will continue to weigh on the eurozone’s industrial sector. Moreover, the positive impact of the depreciation of the trade-weighted exchange rate of the euro in the first half of this year seems to be waning. Having said that, we expect the slowdown in overall GDP growth to remain limited, as domestic demand should be more resilient, as it is being supported by low interest rates, easing bank lending standards and a gradual labour market recovery.