Daily Market Update: Weak US consumer confidence defer its first hike
The monthly reading of US consumer sentiment published by the University of Michigan is always an indicator to keep an eye on as it provides a timely update on how attitudes among US households (whose spending accounts for some 70% of US GDP) are evolving.
This month’s update, released on Friday afternoon, was always going to take on additional significance ahead of Wednesday’s much-anticipated Fed policy announcement, especially because one of the questions facing policy makers and investors alike is what impact recent upheaval in financial markets may have on prospective economic growth. The signals from Friday’s report argue for some caution in thinking about the near-term outlook for consumer spending as confidence fell by much more than expected in the preliminary reading for September. Headline sentiment fell to its lowest level in a year as households pulled back on their assessment of both current conditions and the future outlook suggesting the weakness and volatility of US financial markets in recent weeks has checked the optimism of the US consumer somewhat.
It’s wrong to place undue weight on any single indicator of course, and in this case it may well be the case that consumer confidence, like the price action in markets of late, may itself be subject to some volatility at present. But for a Fed who is facing still-subdued inflation readings, fragile and volatile financial markets, and a clear downside risk skew from the global (especially emerging market) economic outlook, we are inclined to read Friday’s sentiment report as providing further support for our view that, while Wednesday’s decision is set to be a very close call, on balance we slightly favour a no-change outcome at this meeting. Indeed, weekend news has included reminders if any were necessary of some of the fragilities and sources of downside risk in the wider international environment. Chinese data on industrial production and fixed asset investment were both weaker than expected, though in fairness some encouragement can be taken from a continuation of a slightly more favourable trend in retail sales where the annual growth picked up to 10.8% in August – its fastest pace so far this year. Meanwhile, the BIS is striking a decidedly cautious tone in its latest quarterly review. It notes that “China’s economic slowdown and the U.S. dollar’s appreciation have confronted (emerging-market economies) with a double challenge: growth prospects have weakened, especially for commodity exporters, and the burden of dollar-denominated debt has risen in local currency terms”.
To be clear, we think that the strategic case for the Fed to begin the process of policy normalisation remains strong, and grounded in particular in the marked improvement in the jobs market which has taken the US economy to within the Fed’s own range for estimated full employment. However, tactical considerations around the timing of the first move are important also, and our thinking is that the Fed may well stand pat this week and, given that markets are not priced for a hike this week, take the view that now is not the time to be the source of additional market volatility.. Broadly, we think the Fed has two options: first, it could not hike but signal its strategic intent to do so later this year, subject to ongoing monitoring of economic and financial development of course (i.e. a hawkish no change) or second, it could hike but signal it will be treading very carefully in future as it tracks the evolution of risks to the outlook (i.e. a dovish hike). We are leaning in the direction of the former rather than latter option, though one wildcard that probably deserves some consideration is some form of ‘baby hike’ i.e. a 10 or 15 bps move instead of the presumed 25bps instalment, which could be a less-market disturbing way to get the first hike done and off the agenda. Plus, we think that the communications around the policy announcement (statement and press conference) will potentially be just as important as the rate outcome itself. In terms of fx the dollar has been on the back foot in recent sessions (Eur/USD and GBP/USD are both nearly 2% higher over the past week), and may remain so depending on how dovish the Fed sounds on Wednesday. But our strategic bias remains to expect the dollar to resume a strengthening trend in the months ahead, especially against the euro, where in contrast to the US the ECB is set to continue to supply (potentially even more) stimulus.
Outside of the US, this week is also a bumper week for releases in the UK. CPI inflation for August is published tomorrow and expectations are for the print to advance by 0.2% m/m following negative growth of 0.2% in July. This is expected to leave inflation at 0% y/y after a 0.1% increase in July. Consensus expectations are for core (ex. energy & food) inflation to slow from 1.2% in July to 1.0% y/y. ILO unemployment for July is expected to remain unchanged from June at 5.6% on Wednesday. Additionally, weekly earnings (ex. bonuses) growth is expected to rise from 2.8% to 2.9% m/m in July. On Thursday, retail sales will be published and the headline measure is expected to strengthen to 0.2% m/m in July from 0.1% in June. However, core (ex. auto & fuel) is expected to decelerate from 0.4% m/m in June to 0.1% in July. On a y/y basis, headline and core are both expected to slow to 3.8%, down from 4.2% and 4.3% respectively, but still at relatively healthy levels.
Improvement in the labour market
In the Euro Area, Industrial Production (ex. construction) is announced today for July and is expected to advance 0.3% m/m following a 0.4% decline in June. However, expectations are for the y/y rate to decline from 1.2% to 0.7%. Market participants may be curious as to whether the better than expected provisional GDP figures last week will translate to an improvement in the labour market and employment numbers are published for Q2 tomorrow after 0.1% q/q and 0.8% y/y growth in Q1. ZEW Survey Expectations for September are also announced tomorrow which follows a reading of 47.6 in August. On Wednesday, the HICP for August is reported and expectations are for inflation to come in flat at 0.0% m/m, following a 0.6% drop in July. This would leave HICP at 0.2% y/y, and the pace of inflation for the first 8 months of the year below the 0.2% 2015 ECB projection that ECB President Dragio announced in his press conference last month. Core (ex. energy & food) is also released and market expectations are for the index to decelerate from 1.2% in July to 1% y/y in August.
Additionally, the ECB publish their monthly bulletin and it is possible that analysts hope that the contents will provide a detailed insight into what developments would be necessary for the council members to start considering an expansion of the QE programme.