Global Daily – Fed’s Barkin maintains hawkish line

by: Arjen van Dijkhuizen , Bill Diviney

Fed View: Fedspeak broadly supportive of gradual rate hike profile – With the end of the blackout period following last week’s FOMC meeting, a host of Fed speakers have been on the news wires over the past 24 hours. The most notable of these was Thomas Barkin, the new Richmond Fed president who had yet to make his monetary policy views public, and who importantly is a voting member this year (but not next year). His views had a similar hawkish tilt to his predecessor, Jeffrey Lacker. In particular, he argued that monetary policy is ‘still pretty accommodative’, and that the Fed ‘ought to go to neutral’ given the strong economic performance, low unemployment rate, and with inflation ‘at target’. At the same time, he characterised the path of gradual rate hikes so far as ‘a good one’, suggesting he would be unlikely to favour a more rapid rise in rates than one 25bp hike per quarter. Comments from Atlanta Fed President Bostic (voter) and Dallas Fed President Kaplan (non-voter) were more dovish, with both saying they would tolerate inflation a bit above the two percent target – consistent with the subtle but important use of the word ‘symmetry’ in last Wednesday’s FOMC statement (see here). All told, the comments support our view that the Fed will continue to hike rates by 25bp per quarter until next June, but that even if inflation were to overshoot somewhat, this would be unlikely to lead to a quicker pace of rate hikes. (Bill Diviney)

China Macro:Strong trade data, despite US tensions – China’s trade numbers for April published this morning proved strong, beating expectations. Last week’s below 50 reading of Caixin’s export subindex triggered concerns over China’s export prospects against the background of US trade actions, and the threat of further import tariffs. However, exports in dollar terms came in at 12.9% yoy, following a weak reading in March (-2.7%) that mainly reflected payback from a stunning February figure. Total export growth in January-April 2018 was 13.7%, almost twice the growth rate of 2017. This is in line with our view that China has not only contributed to the ongoing strong momentum in global growth and trade, but is also clearly benefiting from it. Meanwhile, import growth in dollar terms rose to 21.5% yoy, up from 14.4% in March. Import growth in January-April 2018 (+19.6% yoy) has also outpaced the already high 2017 average (16.1%), so far defying general expectations (including ours) that import growth would slow this year. This does not only reflect solid domestic demand (with GDP growth stable at 6.8% yoy in Q1), but also the pick-up in exports, as a significant proportion of Chinese imports are export-related. Note that exchange rate effects are playing a role as well in explaining the strong trade numbers (CNY has firmed by around 8.5% versus USD since 2016, despite a recent weakening), as the data are much less impressive in yuan terms. Going forward, we still expect some slowdown of Chinese trade growth in the course of this year, partly reflecting base effects. Rising China-US trade tensions add to the downside risks, although the dialogue is continuing, with President Trump speaking on the phone with President Xi today, and vice premier Liu visiting Washington next week after last week’s high-level negotiations in Beijing. (Arjen van Dijkhuizen)