Global Daily – Fed-speak tilts hawkish ahead of payrolls

by: Bill Diviney , Aline Schuiling , Georgette Boele

Fed View: Risks tilted to the upside for most on the FOMC – A number of FOMC members have spoken over the past week, and the shift in tone of moderate doves in particular supports our view that the market has underestimated the hawkish shift on the FOMC following the March meeting (see here). Specifically, Bostic, Harker, and Brainard all pointed to tax cuts and government spending as pushing the balance of risks for the outlook to the upside, and for these members this has strengthened the case for rate hikes. The outlier was St Louis Fed President Bullard, a more established dove. In his view, the fed funds rate is already close to neutral, and although he noted that inflation expectations have increased recently, Bullard is sceptical of the impact of wage growth, stating that ‘even outsized gains would not ultimately have too much effect on inflation’. We are inclined to agree with Bullard, and continue to expect higher productivity growth to dampen the inflationary impact of higher wage growth. However, we think that most members of the FOMC will be more directly responsive to higher wage growth – likely viewing it as a sign that the Phillips Curve is alive and well, and that the labour market may be overheating (see also here). We expect another strong employment report tomorrow, and should this be accompanied by a renewed pickup in wage growth, this will further bolster the case for tightening on the FOMC. (Bill Diviney)

Euro Macro: Sluggish retail sales not a sign of weak consumer fundamentals – The volume of retail sales in the eurozone rose by only 0.1% mom in February, which was weaker than the consensus forecast of 0.5%. Moreover, the January number was revised downward, to -0.3% from -0.1% mom. We do not think that these weak numbers at the start of this year are signalling a more fundamental slowdown in private consumption growth, and we expect sales to rebound in the coming months. The eurozone labour market has continued to improve, with the unemployment rate falling to its lowest level since the end of 2008 in February. We expect the unemployment rate to continue to decline in the coming quarters as employment growth should strengthen somewhat. On top of that, consumption growth should continue to be supported by an ongoing housing market recovery, which is fuelled by the low level of interest rates. Finally, wage growth, although at subdued levels, should be slightly above inflation on average this year. Another reason to be optimistic on consumption growth is that consumer confidence is at historically high levels. Although confidence edged lower a touch since the start of the year, it has remained at levels well above the long-term average. (Aline Schuiling)

FX: No clear direction for EURUSD – Since mid February, EUR/USD has mainly moved sideways. This is because opposing factors have balanced each other. On the US side, the deterioration in the fiscal balance, political uncertainty and hawkish foreign and trade policy have weighed on the US dollar, while Fed rate hikes have been supportive. On the European side, the downward adjustment in ECB rate hike expectations for 2019 and the excessive net long euro positions have weighed on the euro. In addition, periods of risk-off sentiment have generally supported the dollar because of some safe haven demand while in periods of risk-on investors shunned the dollar. All in all, there is no a clear direction for EUR/USD. We think that the risk in the near term for a lower EUR/USD (towards 1.20) is higher than a break above this year’s high layered at 1.2555. Our year-end 2018 and 2019 forecasts stand at 1.20 and 1.30, respectively. (Georgette Boele)