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US Macro Report

The Domestic Setting

The Federal Reserve Open Market Committee met on the 28th of October to discuss monetary policy in the US. It assessed that while economic activity is growing at a rate greater than that during the 2008 recession, labour market indicators are below expected levels. Unemployment rate figures for October, released on the 6th of November, showed a slight fall from 5.1% to 5% as nonfarm payroll employment increased by 271,000 from 142,000 jobs created in September and 136,000 in August. However, figures showed a reduction in growth rates for Personal income and Spending from 0.4% in the previous month to 0.1% this month. It must also be noted that the IBD Consumer Optimism index fell from 47.3 to 45.5, despite market prediction of a marginal increase to 47.4 and the New Home Sales Index fell from 529 points to 468 despite the market’s expectation of an increase to 550 points.

The FOMC stated its expectation that inflation would gradually rise towards 2% in the US as economic growth continues to accelerate and unemployment continues to fall. Ultimately, the FOMC elected to leave interest rates unchanged, with the Federal Funds rate between 0% and 0.25%. Its public briefing concluded by cautioning against forecasting a short-term funds rate rise, saying that economic conditions may require low interest rates for a long time before the FOMC feels comfortable constricting the money supply. Yields on two-year Treasury notes rose by 8bp at the Fed’s comments whilst the Dollar rose 0.9%. The Greenback has continued its upward trajectory against most major currency pairs including the EUR, GBP and CN¥. Expectations that the Fed would lift Interest rates before December fell due to the flat inflation rate in September and a GDP growth of 1.5% that failed to meet expectations and was significantly weaker than the previous quarter. Given the status quo, a rate rise in December is most probable.

Asia and the Eurozone

Weak global growth has begun to take its toll on the US economy especially given the recent Chinese government announcement that the economy grew by 6.9% in the third quarter with nominal growth estimated at 6.2%, the weakest since 1999 and since the onset of the financial crisis. This is being put down to a transition from an export and investment driven economy to one that is driven instead by domestic consumption as can be seen by the economy’s slowdown in fixed asset investment from 10.9% to 10.3% in the previous quarter. This can also be seen largely in its falls in exports, by 5.5% in August, after an 8.3% drop in July. Imports, mostly of raw materials, fell by 13.8% in August. As a result of weakening domestic conditions, the Chinese Central bank has cut its benchmark rate for the sixth time in 12 months briefly triggering a rally in global equities and commodities. On the 3rd of November, the Chinese Communist party released its 5-year report for 2016 to 2020. The anticipated GDP growth level of 6.5%, a 0.5% fall from the previous 5-year report, is also a fall relative to the economy’s current growth level. Later today, the 8th of October, the Chinese government released figures for showing a 6.9% fall in year on year Exports and a 7.1% fall in Imports. Whilst leaving China with its highest trade surplus on record, the changes suggest that domestic demand is not as strong as is needed to continue supporting its economic growth at the current rate. The Communist Party’s own reservations for the future growth rate of the Chinese economy tied with its currently ailing rate of growth has severe implications for all of its trading partners.

In India, growth was down 0.5% in the second quarter as a result of low export levels. Its trade deficit reduced to -$10.5 billion from -$12.5 billion in September as exports fell by 24.3% year on year from a being down 20.7% in the previous quarter. Imports fell further from negative 16.6% year on year to negative 25.4%. The PMI Manufacturing index was down to 50.7 from 51.2 in the previous quarter. The diminishing growth prospects of two the fastest growing global economies will continue to plague the US economy over the coming months.

The Eurozone experienced a greater fall in the consumer confidence index than expected, falling by 0.6 points to -7.7 within the euro area and by 0.2 points to -5.7 in the EU. Inflation barely remains above zero at 0.2% and will likely miss the ECB’s original targets for both 2016 and 2017. Inflation targets have now been cut to 1% and 1.5% respectively. As a result, the ECB has announced an extension of its €60 billion monthly bond repurchasing programme; further pushing European bond yields down. German bunds hit a record low of -0.32% and global equities rallied at the news. The Bank of England maintained its base rate of 0.5%; it is likely to wait for the FOMC to raises rates in order to avoid a capital influx into the UK economy by pre-empting the US.

Commodities

In Commodities, the Gold price continued its fall, reaching its lowest point in three weeks, a decline attributable to the Fed’s expected rate rise in December. Gold futures for December delivery settled down 2.4% at around US$1,150 an ounce whilst the Copper price also hit a three-week low, reflecting global demand concerns. Oil prices remain low as the US benchmark West Texas Intermediate (WTI) for delivery in December traded at around US$46 per barrel. Oil stockpiles increased by 3.4 million barrels, below an industry group estimate, however it must be noted that a recent fall in US oil rig count could imply a future reduction in domestic crude production in the coming months.

Looking Ahead

Following the contents of the Fed Open Markets Committee’s latest policy statement on Wednesday the 28th of October all eyes will look forward to the Fed’s December meeting. In a recent survey, 65 per cent of the 46 economists from leading banks in the US, Europe and Asia said they expected the central bank would increase the Federal Funds rate at its December meeting especially given the latest employment data. Figures for China’s Retail Sales and Industrial Production will also be watched closely for any indicators regarding its economic growth. In the US, figures for Retail Sales, CPI and Manufacturing will be analysed carefully given their relevance to the Fed’s upcoming rate setting meetings and the fact that the US recovery is still largely being driven by consumer spending. The Eurozone’s GDP growth figures will also be watched attentively. Expectations are for a year on year increase of around 1.7%, largely driven by consumer spending.

 

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