Macro Weekly – First hike after almost 10 years

by: Han de Jong

Macro-Weekly-11-December-20151.pdf (123 KB)
  • The almost certain rate hike by the US Fed will be the first one in almost 10 years. Some anxiety is to be expected.
  • Expect Yellen to stress that the tightening process will be slow
  • French and Italian industrial production growth is accelerating
  • There are tentative signs that Chinese imports are stabilising. This is good news for world trade growth in 2016.


The US Federal Reserve is very likely to raise rates shortly. This will be the first change of rates since the end of 2008 and the first increase in official rates since mid 2006. Many market participants have never experienced a US rate hike before and some anxiety is understandable. This will undoubtedly be one of the best flagged rate increases ever, so it is hard to see how people can be caught off guard, but you never know.

More important than the actual rate decision are the comments that Fed chair Yellen will make. We expect her to stress that the pace of the further tightening process will be slow. I guess that is what most others are also expecting. Any deviation from that message can lead to a strong market reaction. At this stage, though, the best thing for the Fed to do is to get it over and done with.


The economy, meanwhile, continues to grow at a moderate pace, enough to push unemployment down, but with a couple of weak spots. Recent economic indicators show the labour market is continuing to make progress, but confidence of small businesses softened somewhat in November. Small business confidence is strong, but has weakened throughout the year. Perhaps this is related to the drop in the growth rate of industrial production. It seems to me that the strong dollar and somewhat weaker industrial activity globally are the main culprit. As final demand remains firm, I would expect output growth to strengthen in the period ahead.

0.3% growth

The Japanese and the eurozone economies both grew at a moderate 0.3% qoq pace in the third quarter. That represented an improvement for Japan, following a contraction in the previous quarter. For the eurozone it meant a mild slowdown from a growth rate of 0.4% in the second quarter. I don’t think we should read too much in these small variations of the growth rate in the eurozone. On the side of positive surprises, French and Italian industrial production growth is accelerating. Who would have thought it!


Our call on China

Our 2016 outlook for the global economy depends partly on what will happen in the Chinese economy, more specifically, what will happen to Chinese imports. What other countries can export to China is really more important to them than the question by how much the overall economy in China is slowing. While China’s import growth has slowed in recent years, they have actually contracted in 2015. We reckon the drop in imports was not only due to price movements, but also to a fall in volumes. Our cautious optimism for 2016 is based on the forecast that a contraction of imports is inconsistent with developments in the rest of the economy and is most likely temporary.


For our cautiously positive view to come through, we need to see an improvement in Chinese import numbers. Recent data provide some ground for optimism. Chinese imports were down 8.7% yoy in (dollar) value terms in November. While that does not sound great, it was a lot better than the -18.8% registered in October and the -14.8% average for the first 11 months of the year.

As it is hard to interpret Chinese statistics, one should look for other evidence supporting one’s tentative conclusion. Trade data in other Asian countries provide mixed signals. Korean exports appear to be improving and business confidence in several Asian economies has been picking up somewhat since the late summer. On the other hand, Taiwanese export data are showing no sign of improvement.

German industrial orders data may also be interesting. This year has seen a significant divergence of industrial orders from within the eurozone and orders from outside of the eurozone with the latter being particularly weak. However, a modest improvement has occurred in the last two months. Perhaps that is a sign that Chinese imports and world trade are at least stabilising.