Macro Weekly – Here comes Janet Yellen

by: Han de Jong

  • The Goldilocks of US payrolls
  • German orders: a shocker
  • Asian trade data: stellar, but perhaps distorted
  • Here comes Janet Yellen
Macro-Weekly-10-March-2017.pdf (172 KB)

This week was relatively light on macro data. Arguably the most important set of data was the US payroll report. The outcome was close enough to expectations not to worry anybody. Payrolls increased by 235,000 in February, somewhat above expectations. Perhaps more important, average hourly earnings rose 0.2% mom against expectations for a 0.3% monthly increase, after a slightly upwardly revised increase of 0.2% in January. The result was that the yoy rate of increase of average hourly earnings amounted to 2.8%, as expected. The gentle upward trend of earnings growth is continuing, but this should not feed fears for a sharp rise in inflation. On balance, this looks like a Goldilocks scenario to me.

Poor German orders, somewhat better output

The European agenda was also relatively light this week. German factory orders were a shocker: they tumbled 7.4% mom in January, more than reversing the 5.2% mom gain in December. In contrast, industrial production growth was strong in January (+2.8% mom) after a weak December (-2.4% mom). Given how overwhelmingly strong a wide range of confidence indices has been recently, the factory orders January numbers look odd. For now, I am assuming that momentum is actually building and this should be reflected in orders and output data before too long.

The amazing story of Asian trade (or is it distorted?)

The most impressive and surprising data come from Asia. Data on trade in the region can be distorted early in the year due to Chinese New Year moving around in our calendar. But there is no doubt that the February trade numbers for China and Taiwan are very strong. The weakest of the numbers was Chinese exports in dollar terms. They were down 1.3% yoy, but this follows a plus of 7.9% in January. Taken the two months together, their average is still a lot stronger than Q4 2016. Chinese imports were up 38.1% yoy, following an increase of 16.7% in January. It seems to be that the numbers may be flattered by some big-ticket items coming from Taiwan. Taiwan’s exports were up 42.1% yoy in February after 8.6% in January. Last, Taiwan’s imports were up 27.7% yoy, after a rise of 7.0% in January. The average for these two months of +17.3% compares to an average of 14.7% in Q4 2016. I realise this data can be volatile and, as I said, distorted early in the year. But this looks very strong suggesting that global trade continues to build momentum.

Also positive was the small rise (some USD 7 bn) in Chinese FX reserves. February was the first month since June last year in which foreign exchange reserves increased a little. It is not clear what is behind this improvement (stricter and more effective foreign exchange controls or genuinely less appetite for capital outflows, but it must be taken as good news. It may be a sign of less danger of disruptive capital outflows.

ECB unchanged, but here comes the Fed

The ECB left its policy unchanged, but changed its tone a little, in line with the improvement in the economic data. The hawks will have to be patient, though. Having committed to an extended QE programme in December it is far too early for the ECB to do a U-turn. And while it may be true that deflation risks have more or less disappeared, an early change of direction may prove premature. Surely, the ECB does not want to repeat a mistake made by the US Federal Reserve in 1937 and certainly not the embarrassing mistakes of tightening policy in 2008 and in 2011.

The coming week will be an interesting one. The Fed’s policy committee announces the results of its meeting on Wednesday. A rate hike is generally expected (also by us), but the tone of chair Yellen is more important and will give us an indication of what is likely to happen in the rest of the year. We think the Fed will repeat is projection of three rate hikes in 2017 in total. However, there is a risk that the Fed is more hawkish, given the strength in a lot of economic data. This has the potential to push yields on bonds up.