The Global Markets Weekly – 10/12/15

Posted October 12, 2015 by rvillareal

The Courage Not to Act[private]

The window continues to close on the possibility of a FOMC policy rate hike this year.  The August trade data was much wider than expected, which could easily pare Q3 GDP growth by 1 percentage point.  This would come on top of a possible 2 percentage point drag from an inventory correction, if the August and September data are as weak as the latest July data.  So even if domestic demand growth remains a reasonably sturdy 3%, headline GDP growth might well below 1%

If the Q3 slowdown is merely a hiccup with retail sales and consumer confidence holding up, then topline GDP growth will rebound towards 3% by year-end with little lasting harm to the expansion.  Unfortunately, the Q3 slowdown may be something more sinister and long lasting, if export demand continues to sag under the weight of past increases in the dollar (despite its recent weakness) and slower EM demand growth.  But the FOMC will not be sure which scenario is unfolding by year -end, and will probably deem it prudent to not act, especially if the government is shutdown or worse, or had recently defaulted on its federal debt.

The Fed can continue to dither, arguing that they have plenty of time to adjust policy with wage inflation low and steady.  Moreover, with fiscal policy on the sidelines, the onus is on the FOMC to try to keep the economy running “hot” enough to provide further gains to middle class wages.

But the majority at the Fed is missing a big point — the economy is a lot closer to normal than policy is.  If the normal fed funds rate is 3.5% when GDP growth is 3% and inflation is at 2%, then what is the right funds rate when GDP growth is 2 1/2% and inflation is closer to 1% —  1.5% to 2%?  But whatever it is, it is a lot higher than zero!  The longer the Fed waits, the more they risk playing catch up ball.  Late and faster might be a worse outcome for the expansion and the markets than slow and gradual.

• U.S.:  Investors will look closely at the business inventories (Wed) for an update on how big the inventory correction will be in Q3.  Any weakness in retail sales (Wed), despite the strength in vehicle sales last month, would suggest that slower growth is spilling over into Q4.  CPI (Th) will decline again.  Any weakness in consumer sentiment (Fri) would suggest that the Q3 inventory correction may be something worse, reducing the chances of FOMC action this year.
• Eurozone:  The October ZEW Survey (Tue) may attract more attention than otherwise, as markets try and glean to what extent the VW scandal may have any real economy fallout, at least on Germany.  Meanwhile, Final HICP data (Fri) should confirm the first negative reading since March.  Notably, services inflation (perhaps a better guide to domestic price pressures) will have picked up to a 13-month high of 1.3%!
• UK:Still-Solid Labor Market! As for inflation, it remains the case that productivity data remains as influential in guiding BoE thinking as will that for wages, thereby putting continued emphasis on the Labor Market Report due on Wednesday.  Otherwise, from the tone of the October minutes, the BoE is not being swayed by the current low inflation backdrop, let alone the risk that the headline CPI rate may dip afresh in coming months, with such a risk discernible in the September CPI data due on Tuesday.
• Japan:  In a light data week, tertiary industry performance may contradict the BOJ’s steady-growth outlook.  This reflects the growth stagnation that different parts of the service sector experienced in August.

gmw_1009[/private]