USA:
- Solid, consumption-driven Q4 GDP was confirmed last week.
- ISM index keeps indicating accelerating activity in the US manufacturing sector.
- Inflation rising, employment report release ahead and Fed speakers’ communication now in line with market expectations.
US Q4 GDP was revised last week and remained unchanged at 1.9 % (q/q, annualized rate), while the underlying expenditure components changed partially (Figure 1). The US economy remained driven by consumer demand as well as investment. Personal consumption expenditure enhanced by 3.0 % - higher than according to the first estimate (2.5 %). Increases in government expenditure (0.4 %) and in non-residential fixed investment were smaller than previously estimated (1.3 %). Total fixed investment increased by 3.2 % and, hence, was largely driven by the residential component (9.6 %). Net exports made a negative contribution to GDP growth (exports -4.0 % and imports +10.6 %). In the total of 2016, US GDP grew by 1.6 %.
The ISM manufacturing index – the most prominent country-wide indicator for manufacturing activity – bounced for another month in February (57.7 after 56.0) indication expansion in the US industry. It is the highest reading since August 2014. The forward-looking new orders index registered 65.1; a large increase by 4.7 points from the previous months and the highest reading since December 2013. Of the 18 manufacturing industries, 17 reported growth in February. The ISM reports states that the February index reading corresponds to a 4.5 % increase in real GDP annually. Whereas last week, the prominent GDP now-cast of the Federal Reserve Bank of Atlanta (a real time measure of the business cycle) dropped to 1.8 % from 2.5 % real GDP growth previously.
The personal consumption expenditure (PCE) price index rose from 1.6 % to 1.9 % (y/y) in January, while the core PCE development remained stable at 1.7 %. The PCE is the inflation index that the US central bank refers to as policy-relevant. The consumer price index (CPI) had increased by 2.5 % in January and the core CPI had changed by 2.3 %. The inflation rise had broadly been expected on rises in the volatile energy price segment.
On Friday, the employment report for February will be released delivering on of the most policy-relevant macro data points before the Federal Open Market Committee (FOMC) of the US central bank is going to take place (14th/15th March). Analysts expect non-farm payrolls to have increased by 190.000 in February (Bloomberg consensus forecast). The March FOMC is “live” for a further rate hike and market talk is focused on linguistic inference from FOMC speakers referring to “fairly soon” or “relatively near future” with respect to the timing of the next fed funds rate hike. The May FOMC would also be a possible date for the next hike, although the market implied probability of a March hike moved from 34 to 82 % last week; visible also in the jump of the fed funds rate future. Hence, the previous discrepancy between FOMC speakers’ communication and financial market expectations disappeared last week (Figure 2).
Eurozone:
- Monetary policy relevant disparity between rising headline inflation and sticky core inflation persisting ahead of the March ECB meeting.
As widely expected, the Euro Area inflation rate ticked up further in February (Figure 3). According to the first estimate, consumer prices rose by 2.0 % (y/y) after 1.8 % in the previous month. The core inflation rate (excluding volatile segments such as energy or food prices) again remained unchanged at 0.9 % annually. Core inflation has now hoovered for more than three years around that level.
On Thursday 9th March, the monetary policy meeting of the ECB governing council (GC) will take place. In addition, updated macroeconomic projections prepared by ECB staff on a quarterly basis will be released. There are upside risks to the last staff projections from December. In December, the ECB had forecast that real GDP will grow by 1.7 % in 2017 and 1.6 % in 2018 and 2019. HICP inflation was projected to increase by 1.3 % in 2017, 1.5 % in 2018 and 1.7 % in 2019. Given stronger than expected inflation since December, the inflation projection for 2017 might be increased on Thursday. Currently, the consensus among inflation analyst’s moved up to 1.6 %. Hence, the ECB will likely upgrade its inflation forecast for this year. A simple inflation tracker based on average past monthly price changes would even indicate 1.8 % inflation in 2017.
An upward revision of the inflation forecast could fuel investor’s expectations about earlier than previously expected changes in the monetary policy stance. However, during the press conference following the January monetary policy meeting, President Draghi had had stressed that for the inflation objective of the ECB to be met, that “there has to be durable convergence towards the inflation goal, so it cannot be transient”. Low core inflation today implies a quick return of headline inflation towards lower levels once base effects from past energy price declines fade. He also noted that inflation has to be self-sustained” and it has to “stay there even when the extraordinary monetary policy support that we are providing today will not be there” (see UCM Weekly as of 23rd January). In the upcoming GC meeting and the press conference, Draghi might insist on his previous comments.