Friday December 11, 2015 - 17:30:09 GMT
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Week Ahead Economic Data Analysis
Friday 11 December 2015
FED TO DAMPEN CHRISTMAS CHEER
Fed to raise rates but sound cautious about further moves
Inflation to pick up in November in US and UK
Black Friday could help to boost UK retail sales
Fed set to raise rates. The coming week’s US monetary policy meeting (Wed) could be of historic importance. The FOMC is expected to raise interest rates (by 0.25%) for the first time since June 2006. The recent slide in oil and commodity prices as a whole has prompted some speculation that the FOMC may back off, as they seemingly did in September. However, this time around the FOMC seems to have sent a more emphatic message. In the statement after its October meeting, the FOMC strongly hinted that interest rates would be raised in December unless there was a deterioration in economic conditions. Most Fed speakers since then have reiterated that message. In particular, the labour market, which the FOMC has highlighted as the key area it would be watching, has been much stronger than expected. With financial markets now putting close to an 80% probability on a rate rise, it would probably now be a major blow to the Fed’s credibility if it did not follow up with some action.
Emphasis on “gradual” policy path. Attention is already turning to what happens after the initial Fed move. The FOMC has for some time been stressing that any further interest rate increases will take place 'gradually' and that interest rates will likely peak at a low level by historic standards. Fed Chair Yellen is likely to use her press conference to reiterate this message. Certainly, with inflation still running well below the FOMC's target and some ongoing headwinds to economic growth, including sluggish expansions in a number of other countries, the FOMC will want to move cautiously. It will also wish to avoid a potentially sharp adverse market reaction to its initial hike and the best means of achieving this will be to emphasise their intention to move slowly. Moreover, Yellen will want to ensure strong Committee support for this first tightening. Current signs are that, while a majority of the FOMC are in favour of raising rates, some members still have reservations. It will be easier to prevent at least some of these voting against a tightening motion if the FOMC's overall message is fairly cautious. However, what the Fed means by ‘gradual’ may not be the same as that assumed by markets. The FOMC’s current median forecast implies four rate rises next year. It may temper this but that still leaves plenty of room for market volatility.
Inflation rebounding for now. November CPI inflation data in the US and the UK (both Tues) and the final update for the euro area (Wed) are all likely to show annual headline inflation higher than in October. Whether this trend continues in part depends on whether commodity prices now stabilise. In the UK labour market data for October (Wed) are forecast to show further strong employment growth. However, the annual rise in earnings seems set to decelerate. Unfavourable comparisons with the same period a year ago suggest that this slowdown could persist for a few months, which will remove the most obvious recent sign of building cost pressures. November retail sales data (Thurs) include “Black Friday”. This adds to the challenge of seasonal adjustment of consumer spending data at this time of year, meaning that the potential for a surprise is high.
Mixed messages from other central banks. The coming week will also see central bank policy meetings in Sweden (Tues), Norway (Thurs) and Japan (Fri). Policy is expected to be unchanged in Sweden and Japan but there are expectations of 0.25% deposit rate cut in Norway. In the euro area, the December ZEW and IFO surveys for Germany and the ‘flash’ PMIs for the region as a whole will provide further updates on Q4 economic activity. They are expected to show growth continuing at a moderate pace.
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