Global daily insight 16 september 2016

Daily Insight

Group Economics Macro & Financial Markets Research

16 September 2016

US consumer faltering?

US consumer fal Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

US Macro: Weak retail sales suggest no rush for rate hike in September - Retail sales have weakened in the past two months, suggesting that consumers have become more cautious during the current quarter. This is in contrast to the second quarter when consumers were the crucial driver of economic growth. August retail sales declined by 0.3%, after an upwardly revised 0.1% the previous month. At the same time, core retail sales, which are more closely related to the consumer spending component of GDP, fell by 0.1% after also declining by 0.1% in the previous month. Sales fell in most categories.

Meanwhile consumer confidence surveys, have been holding up well. The Conference Board’s consumer survey has been trending steadily upwards, while the University of Michigan’s consumer survey has been slightly weaker in the past few months, but remains at high levels. These surveys and a strong labour market suggest that consumer spending should remain decent in the coming months and that we are not on the cusp of a sharp slowdown. Nevertheless, the retail sales report does raise uncertainty following the weak ISM numbers and we think that this report will make FOMC members less confident to vote for an increase in the policy rate in September. We think that the Fed will hike in December.

(Maritza Cabezas) Global markets: Higher yields and stronger dollar despite weak US numbers - The weaker than expected US economic data led to curious moves in financial markets.

Investors took the view that a Fed rate hike this year is less likely now. This was also reflected in equity markets holding up relatively well. However, the reaction in the bond market and currency markets was the opposite of what would be expected. The initial reaction to the weaker US data releases was that US Treasury yields and the US dollar moved somewhat lower. However, soon after they reversed course and rose in tandem. Not only did US Treasury yields rise, also 10y government bond yields in the eurozone, the UK, Switzerland, Sweden, Australia and Canada moved higher. This reflects that the negative sentiment in the bond market – reflecting general worries that central banks are reaching the limits of monetary stimulus – is continuing. The rise in bond yields is not only providing some support for the dollar, but is also proving negative for precious metal prices, again despite easing Fed rate hike expectations. Gold, silver and platinum prices lost close to 1%.

Gold prices are approaching our lower border of the USD 1,300-1,350 range. Our year-end target is USD 1,325 per ounce. We continue to think that the bond slump will prove shortlived, with the ECB (December) and BoJ (September) set to extend QE in the coming months. (Georgette Boele) Euro Macro: Exports of manufactured goods under pressure - Monthly foreign trade data published by Eurostat showed that eurozone exports fell by 1.1% mom in July, while imports rose by 1.4%. This suggests that the two combined reduced eurozone GDP growth at the start of Q3 after they lifted growth by 0.4pps in Q2. Although the monthly trade data are expressed in current prices and their GDP counterparts are in constant prices, they often move in the same direction. Eurostat also published detailed aggregate data for Europe as a whole for the period January-July. They give some interesting insight into the

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Daily Insight - US consumer faltering? - 16 September 2016

underlying trends in foreign trade. Compared to the first seven months of 2015, both exports and imports declined by 5% this year. The trade balance in total primary goods (food, raw materials, energy etc.) improved but the balance in manufactured good (almost 85% of total exports) deteriorated. Exports of manufactured goods dropped by 4% yoy during JanuaryJuly, while imports of manufactured goods stabilised. Exports of chemicals fell by 2% (imports were flat), of machinery and vehicles by 4% (imports +1%) and of other manufactured goods by 4% as well (imports -2%). These data suggest that Europe lost some competitiveness in the first seven months of this year, which may very well be due to the stronger euro. (Aline Schuiling) BoE view: On hold as expected, upgrade of outlook likely in November - The MPC kept both its policy rate and target for asset purchases unchanged as expected in a unanimous decision. When it announced the monetary stimulus package in August, it had hinted that additional measures could follow soon, in particular an additional interest rate cut. Following today’s decision as well, it noted that the majority of MPC members expected to cut rates again going forward if the BoE’s outlook of August was confirmed. However, in our view the macro data has clearly surprised to the upside since then. They suggest that the UK economy is likely to settle in a trend of modest economic growth rather than recession following a short-lived shock immediately after the EU referendum. In our view, this means that the BoE’s August forecast that the UK economy would see average growth of 0.7% next year, has already been overtaken by events. We therefore do not expect further monetary stimulus in the months ahead. The MPC still seems to be holding on to the August outlook. Although it admitted that the second half slowdown might be less severe than previously forecast, it said it could not infer from the near term about its medium term projections at this stage. The MPC will update its economic forecasts in November, and this may be the moment the MPC adopts a somewhat more positive tone on the outlook and suggests it has done enough to cushion the economy. (Nick Kounis)

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Daily Insight - US consumer faltering? - 16 September 2016