US
While leaving rates unchanged, the Fed’s statement noted the downside risks to growth from global economic and financial developments. Just as important, the Fed’s dot projections moved the expected pace of rate hikes down significantly, with the median estimate falling 50 basis points to just 0.9% at the end of 2016, implying two rate hikes instead of four this year.
The Fed also moved down its estimate of the longer-run Fed funds rate to 3.25% (from 3.5%) previously, helping to put downward pressure on long-term bond yields.
This week’s dovish outlook from the Fed sent the dollar lower and oil higher. Both WTI and Brent pushed through the $40 per barrel barrier. Hopes for production cuts and dwindling fears of a global recession contributed to the continued recovery in crude and other commodities.
Inflation measures continued to turn higher in February. Core CPI rose by the most in more than four years. Housing starts jumped 5.2% in February while new building permits fell 3.1%. Retail sales fell a disappointing 0.1% in February while January’s sales figures were revised lower. Core sales, however, remained slightly positive for the quarter.
Next week is a light one in terms of data releases in the US. The two most important ones will be Markit manufacturing PMI and durable goods orders due Tuesday and Thursday respectively. Also both existing home sales and new home sales for February are due during the week.
UK
Next week CPI figures for February will be released and are expected to show that the inflation pressure in the UK is still muted.
This means that the Bank of England is in no hurry to raise rates and can stay on hold until after the referendum.
Other several activity indicators are due, such as GfK consumer confidence, PMI manufacturing, index of services and retail sales. The expectation is for them to show that growth has slowed as Brexit uncertainties have hit the economy.
The third estimate of GDP growth in Q4 15 is due.
The full consequence of the UK’s European Union membership referendum is almost impossible to predict. There is a high probability that the EU as an institution will be hit harder if the UK leaves than the UK economy itself.
Since David Cameron announced the UK’s EU membership referendum in January 2013, sterling has taken a hit. Investors are concerned about what will happen and have therefore sold the GBP, causing the currency to depreciate. The volatility in the foreign exchange market will most likely increase in the run-up to the referendum on June 23. However, a big issue for UK policymakers will be the Scottish dilemma, where Scotland wants to be a member of the EU.
EU
In the euro area the ZEW, Ifo and PMI business surveys for March will attract attention after all three figures declined in January and February, with the financial uncertainty having a negative spill over to economic sentiment. The expectation is for the improved financial risk sentiment to result in a stabilisation, but not a strong rebound in the three figures.
After Easter the euro area inflation figures for March is released and are expected to remain in deflation territory. This should occur because the drag from energy price inflation is set to go up despite the higher oil price.
In the euro area, M3 money supply and bank lending for February will give the first data point in determining the price on the ECB’s new TLTRO II loan.
The lending figures are relevant as the interest rate on the new TLTRO II loan is dependent on lending growth in the period from February 2016 to January 2018.
Japan
The central bank left policy unchanged but downgraded its economic outlook at its meeting on Tuesday.
The BoJ primarily blamed a slowdown in emerging markets for the downgrade. Despite adopting negative rates at its January meeting, the BoJ must now contend with a strengthening yen, a further headwind to growth and inflation.
China
At the annual meeting of the National People’s Congress in China, which just ended, the government presented its targets for 2016 as well as the priorities of the 13th five-year plan.
From an economic perspective, the short-term priority is to stabilise growth, at the risk of postponing the needed debt reduction process for corporates and local governments. The economic growth slowdown and troubles in the industrial sector continued to worsen in the first two months of 2016.
The background is a severe excess capacity problem in heavy manufacturing and housing. The structural changes needed to get out of this rut are slow in coming.
The National People’s Congress announced more fiscal stimulation and continued monetary accommodation. That way it hopes to postpone the pain. However, the risk is that the ultimate pain will be much greater.
Sources: Danske Bank, TD Economics, BNP Paribas, Handelsbanken, Wells Fargo. MFS Investment Management.
