Macro Insights

Paris, 11/09/17

 

Harvey clouds US Federal Reserve outlook, while ECB remains on track for an October announcement

  • ECB: Rendez-vous in October. As we expected, the European Central Bank chose to keep interest rates steady when it met on 7 September and made  no change to non-conventional policy (QE) or its forward guidance. ECB president Mario Draghi confirmed during the press conference that the “bulk of the decisions” for the future path of QE will be announced in October. We still expect the ECB to announce a reduction in the pace of asset purchases to €40bn per month in the first half of 2018 “and beyond if necessary”.
  • Again the US awakens to the devastating aftermath of a hurricane. Rising estimates of Harvey’s damage and the subsequent impact of Irma will increase short-term disruption. Qualitatively we stick to our estimates that these storms will have only a modest impact on short-term growth and, this will likely be reversed in subsequent quarters. However, quantitatively the scale of this disruption is likely to increase: Third quarter GDP growth is likely to be closer to 2%, before rebounding towards 2.5% in the final three months of the year. We leave our estimate for 2017 unchanged at 2.1%. The short-term disruption decreases the Fed’s visibility of the economy’s underlying trend. We expect it to announce the start of balance sheet unwind next week, but a further hike in December, which on balance we still expect, will be data dependant – particularly in respect of inflation.
  • The People’s Bank of China lowers its reserve requirement on RMB FX derivatives to 0%, from 20%. The reserve requirement (RR) was raised in September 2015 and later January 2016 to stem RMB depreciation. Since the RMB is no longer on a declining path, the RR has run its course on constraining RMB short-selling. We see the reversal in the RR being partly a return to normality and partly a signal that Beijing does not want to see one-way expectations in the market flipping from RMB depreciation to appreciation. As a result of these recent developments, we have lowered our yearend CNY/USD forecast to 6.5-6.7.
  • The Bank of England meeting on Thursday will dominate a busy UK calendar. We expect the BoE’s monetary policy committee to vote, 7-2 to leave policy unchanged. However, consistent with August’s Inflation Report press conference briefing, we expect the tone to be hawkish. Consumer price inflation data due on Tuesday is expected to pick-up after recent softer releases and we are pencilling in CPI rising to 2.8% (in line with consensus) with the base effect of last year’s August rate cut to lift RPI inflation to 3.9% - a five and a half year high. Labour market data is also expected to continue to record robust employment growth, although earnings growth should remain relatively subdued. With our initial expectations that GDP growth could accelerate to 0.4% in the third quarter, the MPC is likely to again warn that the yield curve  is pricing in too little tightening. We expect disappointing GDP growth and political uncertainty to keep the MPC on hold into 2019, but the risk of marginally firmer activity prompting a hike around mid-2018 is material.    

Upcoming events:

  • Euro area data: Final CPI prints for Germany, Spain (Wednesday), France and Italy (Thursday), consumer surveys for France, Germany, Italy and Spain (Thursday)
  • United States: Retail sales & industrial production (Wednesday), CPI (Thursday)
  • Rating reviews on Friday : Portugal (S&P), Ireland (Moody’s)

 

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The Research & Investment Strategy (R&IS) team at AXA Investment Managers present their views on recent developments and the factors shaping markets over the week ahead. For more information on the R&IS team or any of the above comments, please contact us or follow us on social media for updates throughout the week

 


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