US
Personal spending rose by a solid 0.4% month-on-month in May, coming on the heels of an impressive 1.1% month-on-month gain in April, while initial jobless claims suggested robust job growth continues.
The US economy should remain relatively well-insulated from Brexit-related spillovers, but some drag may manifest in the second half of year. Still, the impact is expected to be modest, lowering growth by just 0.1 percentage point relative to earlier forecasts.
The stronger dollar, coupled with increased uncertainty and slower global growth will likely dampen whatever appetite the FOMC may have had to raise rates in the near-term. Still, the Fed will not sit on the sidelines indefinitely, and can sneak in a rate hike in early 2017, or even in December.
On Tuesday the FOMC minutes from the June meeting will be available, where the focus is on how Fed discussed the implication of a potential Brexit risk at that time (the meeting took place before the UK’s EU vote).
Since Yellen said at the press conference that a Brexit ‘could have consequences’ and that the UK’s EU vote weighed on the Fed’s decision to stay on hold, it will be interesting to see the discussions among members.
The main scenario is that the Fed is on hold until June 2017, as most voting members have a neutral-to-dovish stance on monetary policy and would rather postpone the second hike in order to analyse the impact of Brexit.
UK
UK gross domestic product in Q1 was confirmed to have increased by 0.4% compared to Q4 2016 and increased by 2% compared to Q1 2015, unrevised from previous estimates.
Total domestic expenditure (the sum of all expenditure by UK residents on goods and services that are not used up or transformed in a productive process) increased by 0.3% in Q1 2016.
Looking back, GDP decreased by 6.3% from the peak in Q1 2008 to the trough in Q2 2009, a little more than previously estimated. Having regained its pre-downturn peak in Q3 2013 (one quarter later than previously published), GDP in Q1 2016 is currently 7.0% above its pre-downturn peak.
On Thursday, Governor Carney at the Bank of England made a second statement following the first statement on the morning after the EU referendum. He said that monetary policy has to be even more accommodative, which caused the GBP to weaken again versus the EUR and the USD. “In my view, the economic outlook has deteriorated and some monetary policy easing will be required over the summer.” Governor Carney added, “In particular, monetary policy cannot immediately or fully off-set the economic implications of a large, negative shock.”
EU
In June, annual flash HICP inflation in EU increased to 0.1% from -0.1% previously. That was a touch higher than expected, but not surprising after seeing the German, French and Spanish numbers beforehand. The rise was primarily attributed to less of a drag stemming from energy inflation.
Service inflation did increase (to 1.1% year-on-year), although that was mitigated by industrial goods inflation decreasing once again (to 0.4% year-on-year). Annual core HICP inflation thus also increased a notch, to 0.9% (previously 0.8%). Hence, headline inflation seems to have left negative territory for now and is expected to climb for the reminder of the year.
In the EU area, the UK’s decision to leave the EU will shave about 0.5% off the eurozone’s GDP in 2016−17 by fuelling uncertainty, hurting trade and tightening monetary and financial conditions.
The ECB is likely to respond by providing additional liquidity and potentially front-loading asset purchases. A 10 basis points cut in the repo rate is also possible. These measures are likely to come on top of the six-month extension of the asset-purchase programme that we still expect the ECB to announce in September.
The long-term economic impact of ‘Brexit’ is unclear. It will depend on what form the new EU-UK relationship takes, including decisions on trade, regulation and competition. The UK’s departure may temper its dominance of EU financial services, potentially to the advantage of other financial centres.
The key risk for the EU is that the UK’s departure could have a contagion effect and that support for EU-sceptic or protest parties would increase. If so, the impact could be bigger in non-eurozone countries than in the euro area, which has successfully managed periods of market tension in the past.
China
The official Chinese manufacturing PMI fell from 50.1 in May to 50.0 in June, whereas the alternative manufacturing index from Markit fell from 49.2 to 48.6. Both were a little weaker than expected. The PMIs fell for the third month in a row.
Still, as long as the March jump is not fully reversed, the PMI data seems to be confirming that economic growth has stabilised.
Furthermore, the official non-manufacturing PMI actually increased from 53.1 to 53.7, and thus remains fairly good. It was primarily the construction sector sub-index that increased.
On the other hand, following the disappointing activity indicators for May and especially the decline in fixed asset investment growth, it becomes more and more apparent that growth in the activity indicators is not likely to increase during the summer.
Japan
In three years of “Kurodanomics“, the Bank of Japan (BoJ) has bought massive amounts of government bonds. Still, the goal of this aggressive monetary policy has not been reached.
The rate of inflation is still way off its 2% target and even dropped back below zero recently. Apart from foreign exchange interventions or acts of desperation such as “helicopter money”, the BoJ appears to have run out of options.
Sources: Danske Bank, Commerzbank, Haendelsbank, TD Economics, BNP Paribas.