FOMC: hoist on its own petard
The FOMC this week holds a mid-quarter meeting after which there will be a Statement but no new projections published or a Press Conference. A change in official rates is theoretically possible but unlikely as the Committee now has to live with the consequences of its decision to hike in December. There appear to be four main options that could be flagged in the Statement:
- Brazen: insist that all is going according to plan and stick to the narrative of four more hikes in 2016.
- Honest: admit that the economic outlook is deteriorating and further tightening is postponed indefinitely, as Mark Carney has more or less done in the UK.
- Disingenuous: waffle on about uncertainty and decisions being data-dependent.
- Bountiful: hint at negative rates and more QE if inflation does not pick up soon.
Investors are surely right in expecting disingenuousness and would react strongly to either brazenness or bounty. I am often asked, reasonably enough, to say what I would do in the FOMC’s shoes and, nailing my colours to the mast, my answer is honest inaction. The US economy is just about chugging along without any signs of improvement to justify further tightening. Frankly, the only good argument for the hike in December was to warn people to assess risk more carefully.
Coming up: more evidence of global slowdown
The first cut of US Q4 GDP is due out on Friday and the FOMC will have been given a preview. While less than 1% annualised is expected in line with the Atlanta Fed’s latest GDP Nowcast, cynics have pointed out that neither are good indicators of the eventual number when all the data is collated. What seems clear is the US economy grew by less than 2% in 2015. Meanwhile, the two main January consumer surveys should show confidence holding up, even if it is not feeding through to retail sales.
China has already published its first (and only) cut of Q4 GDP and many government officials have been pointing out that growth of 6.8% in 2015 was the lowest for 20 years. Although this is too close to target to be credible it does suggest that the actual rate is still much higher than in the Advanced Economies. Japan, for example, is likely to disappoint its protagonists yet again with more dire numbers for household spending, retail sales, industrial production and inflation.
France (soft) and Spain (robust) will kick off EZ Q4 GDP reporting but the main interest will be what is happening to inflation in Germany as the month on month figures are falling while the year on year ones are rising. The ECB would prefer a mix of rising inflation in other EZ countries and more business optimism in Germany than is currently being reported.
Finally, the UK also reports its first cut of Q4 GDP and it is likely to be….er….higher unless, of course, the ONS revise Q3 up from the disappointing +0.4%. Official UK data continues to be rather confusing as last week’s batch illustrates. CPI higher because of increased fuel prices? Record employment while average earnings dive? All very odd!
Markets: not really calmer yet
It seems the more aggressive investors got tired of selling after three heady weeks (following a dismal December as the Santa Rally failed to materialise) so they bought things instead. It seems there is still insufficient discrimination between good and not so good stocks, which is the reason we have been advising our clients to hold back. The ECB and BoJ provided a handy excuse for the punters to sell the euro and yen (and buy sovereign bonds) with their wild talk of apparently unlimited further easing but it seems improbable that anybody believes that monetary policy will help economic fundamentals.
Uncomfortable as the thought may be to Messrs Draghi and Kuroda, what matters is not what they do but how investors (especially the algo programmers) think each other will react to what central bankers say. Both seem deluded: Mr Kuroda under orders from the Abe government while Mr Draghi seems to think he is the EMU government (he is getting ever closer to funding fiscal expansion by France and Italy). The FOMC is losing its sway too and once it has waffled its way through this week’s meeting without doing anything, markets may finally start to calm down, which is definitely not the same thing as marching higher again!