Daily Insight
Group Economics Macro & Financial Markets Research
13 October 2016
FOMC minutes suggest time for rate hike nearing Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Fed view: FOMC minutes suggest time for rate hike nearing - The minutes of the 21 September FOMC meeting showed that many participants agreed that ‘the case for increasing the target range had strengthened in recent months’. Although many preferred to wait for further evidence of continued progress of the economy, several member stated that it was a ‘close call’. Those in favour of waiting considered that there was still slack in the labour market and saw few signs of inflation pressures in wage and price developments. In contrast, some participants considered that the economy was moving to full employment and inflation towards the 2% target. As a result, they mentioned that a delay could require a faster pace of rate hikes in the future. On top of this they mentioned that there was a risk that delaying again could ‘erode the credibility’ of the FOMC. Indeed, three regional vice presidents Kansas City’s Esther George, Cleveland’s Fed Loretta Mester and Boston’s Eric Rosengren dissented from keeping the rate on hold in the September meeting and preferred to raise the target rate then. The divided Committee suggests that the upcoming economic data will have to improve to convince the more dovish members of the strength of the US economy. The Federal Fund futures implied probability for a rate hike in December is around 68%. We think that a November rate hike seems unlikely given the proximity of US elections. However we expect a rate hike in December. (Maritza Cabezas) Euro Macro: Solution to Spain’s political stalemate likely - The likelihood has risen that the political deadlock in Spain will soon come to an end. Indeed, we think that it is most likely now that acting Prime Minister Mariano Rajoy will be appointed as the leader of the next government by the end of this month and that a new (third) general election will be avoided. The King of Spain will meet the leaders of the main political parties on 24 and 25 October to try and clear the way. Following the resignation of Pedro Sanchez as the leader of the Socialist Party (PSOE) at the start of the month, it seems that the PSOE will support the appointment of Mr Rajoy as Spain’s next Prime Minister. His party, the centre-right Partido Popular (PP), could form a minority coalition with the centrist Ciudadanos (Cs). Together they currently hold 169 of the 350 seats in parliament. Meanwhile, recent opinion polls show that the PP has gained support since the June-election, while the PSOE has lost. Some polls even show that PP and Cs would get a majority of the seats if new elections were to be held. Despite the more favourable outlook for Spain’s political situation we have maintained our forecast for the 10y yield spread of Spain over Germany at the end of this year at 120bps. Contagion from rising political risks in Italy and Portugal will probably result in some widening of all peripheral yields compared to German sovereign bonds. (Aline Schuiling & Kim Liu) Gold Price View: Forecasts lowered as speculators scale back longs - We have downgraded our gold price forecasts. We previously had a positive outlook (from 17 February onwards) because the gold price broke above the 200-day moving average and overall drivers were more positive, with a Fed rate hike being a distant prospect and other central banks easing. Gold prices mainly rallied because speculative investors turned
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Bloomberg: ABNM