Global daily insight 20 september 2016

Daily Insight

Group Economics Macro & Financial Markets Research

20 September 2016

Waiting for the masters of the universe US consumer fal Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

Fed preview: No change - We don’t think Fed policymakers will hike rates at this Wednesday’s FOMC meeting and the overall communication should be relatively reassuring for investors. We are likely to see a more positive tone in the statement, with the language on inflation less cautious, suggesting that if data continues to improve the door remains open for a rate hike. However, we do not expect an explicit signal on the timing. It is unlikely that the forward guidance in the statement will include the phrase that risks are ‘nearly balanced’, which has been used to signal an imminent rate hike before. In addition, the FOMC will likely lower the so-called ‘dot plot’. With the FOMC likely to take no action in September and November, the path for the median federal funds rate should be lower in 2016, now showing only one rate hike rather than two. Meanwhile, the pace of rate hikes for 2017-2018 will likely be lower than previously. The concerns around productivity growth have been taking the upper hand, suggesting that the estimate of the long-run fed funds rate may well again decline. Meanwhile, we expect the dot plot to continue showing a divergence in views between FOMC members. Finally, we think that the projections for GDP growth for this year will edge down after a weak first half of the year, while core PCE inflation will remain unchanged and unemployment will increase slightly. Our view is that the Fed will hike again in December and that there will be two rate hikes in 2017. (Maritza Cabezas) BOJ preview: Rate cut and increase in QE - The BoJ will be holding its Monetary Policy meeting on Wednesday as well. The results of a comprehensive review of monetary policy will be announced. We expect communication to be strong on all the BoJ can do, but more modest on what it really will do. The Monetary Policy meeting takes place at a time when inflation on all measures continues to trend down, while inflation expectations are just above zero. But there are also concerns about the effectiveness of monetary policy. Therefore efforts to explain and evaluate the current approach are welcome. We think it is likely that the BoJ will step up its monetary stimulus, but not in an aggressive way. We expect the central bank to cut rates further into negative territory (to -0.2%) and increase its asset purchase target (to 85-90 tr yen per annum). For more, see our note Japan Watch: Has the BoJ reached its limits? In the longer-term a serious attempt to make monetary policy more effective will also require reform in the labour market and a credible fiscal plan. (Maritza Cabezas) ECB view: MNI report points to hawkish stance, but should be taken with pinch of salt – A Market News International report on Monday morning, quoting ‘senior Eurosystem officials’ suggested they had a relatively conservative stance. The article quotes six different sources, and each has a slightly different tone. However, there were a number of big picture message. First of all, neither a deposit rate cut nor the dropping of the capital key were realistic possibilities given a lack of support on the Governing Council. Second, it was unclear whether the ECB would further extend its QE programme, with some even hinting at the possibility of tapering. Third, changes in the rules of the asset purchase plan seemed

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Daily Insight - Waiting for the masters of the universe - 20 September 2016

more likely, but that was not urgent. Overall, the commentary was rather hawkish, and it weighed on government bonds. However, we would caution in reading too much in these sources, as MNI has a mixed record in terms of leaks that give accurate guidance on future ECB monetary policy. Apart from anything else, MNI sounds like it spoke to some of the more hawkish officials, that therefore do not represent the centre of gravity in the Governing Council. We continue to expect an extension of QE in December (from March 2017 to September 2017) as well as measures to expand the eligible universe of government bonds (other than the dropping of the capital key). (Nick Kounis) Global FX: Sterling tide turning - In our Global Daily Insight of 8 September 2016 we communicated our upgraded forecasts on the UK economy and on sterling. This was the result of stronger than expected economic data. The improved outlook on the economy and the fact that we no longer expect a BoE rate cut meant that we made signific ant upward revisions to our sterling view. Financial markets have also become less bearish on sterling.

The latest data of the Commitment of Traders report (futures market) show that speculators partially cut back net short sterling positions. However, these net short positions are still extremely large and still show one of the largest short positions since these data were introduced in the early nineties. What does this mean? First of all, speculators have become somewhat less bearish on sterling. Second, they remain cautious and are not convinced yet that the UK economy and sterling have turned the corner. With positions being this substantial, other positive surprises in UK macro-economic data will likely result in an enormous squeeze of these net-short sterling positions. This will trigger a recovery in sterling. Our year-end forecasts for EUR/GBP and GBP/USD are 0.83 and 1.33, respectively. The risk is tilted towards the upside in sterling. (Georgette Boele)

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Daily Insight - Waiting for the masters of the universe - 20 September 2016