Friday January 22, 2016 - 16:13:15 GMT
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WEEK AHEAD: Economic Data Analysis
Friday 22 January 2016
FOMC TO SIGNAL CAUTION AS IT AWAITS FURTHER DATA
- FOMC to stand pat and is unlikely to send a strong signal of a March rate hike
- US and UK GDP releases likely to show relatively modest growth in 2015 Q4
- Modest near-term inflation pick up unlikely to stand in the way of further ECB stimulus
Eventful start to the year in markets. Global stock markets continue to be volatile. While equities have rallied over the past couple of days, many indices are 5% to 10% below their start of the year levels. Concerns about economic slowdown in China and its potential impact on the rest of the world has been the main catalyst for these moves. The slide in the oil price has added to fears about the outlook for the global economy.
FOMC to bide its time. Against this background, the US central bank’s policy committee meets for the first time this year (Wed). As it is only a few weeks since the Fed hiked interest rates, a policy change at this meeting has always been very unlikely. More of an issue is whether the FOMC will use its post-meeting statement to signal a significant probability of another rate rise in March. Certainly, coming into 2015, the majority of FOMC members seemed to be signalling the likelihood of more interest rate increases in 2016 than were reflected in market pricing and that a March move was a strong possibility. Given market volatility and mixed economic data over the past few weeks it now looks as though the FOMC will take a more cautious line. Indeed, what may be of more interest in the coming week is the extent to which the FOMC acknowledges that the downside risks for economic growth and inflation have increased. That does not, however, completely rule out a March interest rate rise if markets settle down and economic data improve. Fed Chair Yellen’s testimony to Congress on the 10th and 11th of February will provide a further signalling opportunity.
US and UK GDP to suggest growth was sluggish in Q4. The first print of Q4 US GDP growth is unlikely to provide much immediate assurance to the Fed, as data released so far points to a below trend outturn of around 1% ann. This probably reflects further inventory cutbacks, while international trade was always expected to contribute little to growth. More of a surprise is the seeming deceleration in both consumer and investment spending. We estimate UK GDP growth to also have been a relatively modest 0.5%, a slight improvement on the previous quarter but still only ‘trend’ growth at best. It should be noted, however, that these sluggish growth rates are seemingly at odds with the strong employment numbers posted in both economies. That could be further evidence of continued very sluggish productivity growth, but it might also be a sign that initial GDP data are underestimating the true growth picture. Other data of note in the US include the Q4 employment cost index (Fri), which is seen as one of the most reliable indicators of wage pressures. It is expected to accelerate modestly. Meanwhile, in the UK the January Lloyds Business Barometer will provide a first reading for 2016.
Euro area inflation bounce unlikely to prevent further stimulus. The initial reading for January euro area annual inflation is forecast to see a second successive monthly rise . While oil prices fell in January, they dropped by even more at the same point last year. That should allow the headline rate to move up to 0.4% (from 0.2%), still well below the ECB’s inflation target. The ‘core’ rate is expected to be unchanged at 0.9%. Such an outturn is unlikely to reduce the odds of the ECB introducing further stimulus measures potentially as early as its next meeting in March. The ECB would have been expecting an even larger pickup in January inflation before the latest oil price fall. It will also be aware that inflation could start to decline once again over the next few months unless the oil price rebounds.
Other central banks may look to ease. The Bank of Japan (Fri) and the New Zealand central bank (Wed) will also hold policy meetings in the coming week. Each will have ongoing concerns that inflation is well below their respective targets. In both cases there is some chance further stimulus measures will be introduced, although the consensus expectation is that they will both hold off for now.
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