The Global Markets Weekly – 6/12/17

Posted June 12, 2017 by rvillareal

FOMC Headlines Trio of Key Central Bank Decisions

A second FOMC rate hike in 2017 is well-anticipated this week, a downright speedy pace after one move each in 2015 and 2016. Markets see one more priced in by December, but then only one in 2018, down from the two seen in March, followed by less than one in 2019. That is a stretch relative to DE thinking, but the data flow and composition of the Fed in 2018 are key current risks.

There are several open questions for this week’s meeting, including how the Committee responds to movement in inflation away from target, just as the jobless rate plumbs well below participants’ estimates of the longer-run rate that might be achieved under appropriate policy. Inflation developments and a more uncertain fiscal outlook might on their own have prompted a pause in past years, but as we discuss in the focus and U.S. sections this week, this time is a bit different given unease with a jobless rate nearer 4% than 5%. While there are counterarguments to rising inflation fears, the central bank’s bias will for now be to nudge rates higher as both financial markets and the real economy continue to perform adequately.

We may see further reduction in the long-run estimate of sustainable unemployment (currently a median of 4.7%), taken lower over time (from 5.6% in 2013) as inflation has failed to accelerate. Somewhere between several and many Fed officials are skeptical of its usefulness, something we expect to see the Fed Chair, and other participants grapple with in the press conference and Minutes, respectively. Pinning down the correct “natural rate” of unemployment in real time is a difficult task, even when researchers work under the assumption it exists.

While Fed Chair Yellen has shied away from weighing in on the quality of jobs, the ECB’s Draghi waded into that pool last week, stating “many of these new jobs are so-called low-quality jobs”. As less-stable part-time, contract, or short-term work are increasingly prevalent, policymakers are likely to put less confidence in any notions of “full employment” than they otherwise might. Wages and inflation will continue to be the indicators to watch in coming months so long as above-trend (100K-plus) jobs growth keeps up.

• S.: A heavy back half of the week with the FOMC, consumer prices, and retail sales all due Wednesday, along with June regional manufacturing surveys (Thu) and the NAHB Housing Index, plus the June U of M Consumer Sentiment survey. With a June hike locked in, data will give a read on prospects for further moves in the second half.
• Eurozone: A lighter week features April industrial production (Wed), and final May consumer prices (Fri).
• United Kingdom: With a muddier political outlook emerging amid Brexit negotiations, we also get a key data slate include May consumer prices (Tue), jobs figures (Wed), and retail sales data (Thu), along with the BoE meeting on Thursday. Supportive monetary policy will continue as data are likely to show ongoing slowdown in household activity indicators.
• Japan: The BOJ (Fri) will keep policy levers on hold, but there is increasing pressure on defining an exit from stimulus measures over time. With the central bank operating so far from its 2% target, it is too early to speculate on exit, but political and operational realities are another matter.
• China: May loan data are due, along with the May retail sales and industrial output figures (Wed).

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