The mystery of US economy
Strong US GDP
The data on US economy released on Tuesday was yet another proof that the Fed needs to raise rates in December. US GDP grew at a higher pace in the second quarter than expected. Inventories rose in August by 1 percent, reflecting the confidence of producers in improving consumer demand outlook. Curiously, GDP was resistant to a drop in inflationary pressures in the second quarter, but remained dependent on the labor market, which appeared to be the locomotive of growth this year.
The Fed realizes that "safe mode” of inflation targeting after years of massive quantitative easing means lack of tools during next recession that's why there is an urgent need to trust current GDP figures and normalize rates to get federal funds rate back to work. In October, the Central Bank planned to start getting out of the debt holdings, normalizing the overloaded balance sheet and conducting a small hike of 0.25% in December, as the economy allows it to be done. The Fed lowered long-term rates to 2.75%, so if the dynamics are good, the arrival to normal rates is likely to be done by the end of next year - mid-2019. Congress approval of Trump's tax plan will mean that the government will take away part of the Fed's work to stimulate the economy on its own, and a high level of consumer sentiment and confidence will guarantee a push in consumer demand from tax breaks.
The subject of concern is the scale of impact on the economy from two natural disasters - Hurricanes Harvey and Irma. In the next couple of months, inflation can easily exceed 2% due to the state help aimed at repairing affected regions. Sharply rising energy prices due to the shutdown of the refineries have made a significant contribution to the acceleration of inflation. There could be backlash after that and it is important that the Fed feel this moment and do not worsen the situation by policy tightening. Therefore, despite the accompanying wind in the form of growth in key indicators, the Fed may be cautious in December and smoothly translate market expectations into the February decision.
Japan’s moderate growth
The Japanese economy does not lag behind its leading world colleagues. CPI accelerated to 0.7% in August, industrial production is experiencing a rise due to the growth of foreign orders. Domestic consumption is still far from healthy shape - retail sales rose by only 1.7% in annual term. The dollar has slightly advanced against the yen but is not in a hurry yet, breaking through the July high of 113.00 allows hope for a further USDJPY rally providing that there is geopolitical calm. From levels above 113.0 it will be even easier for yen to bounce off on the news from North Korea.
Eurozone inflation
On Friday, data on inflation in the eurozone for September came out and unfortunately do not allow to build confident forecasts for the Draghi meeting in October. The target retreated by 0.1% to 1.5%, but consumer and investment sentiments suggest that the slowdown is temporary and that Draghi is about to cut back stimulus. EURUSD walks in aimless range, after going into a steep decline to 1.17 the pair quickly recovered from the hawkish Fed and returned to 1.18. Uncertainty is rising, but it's worth understanding that the ECB has to go a long way to tighten its policy while the Fed is almost halfway through, so the euro's room of growth is undoubtedly greater.
Arthur Idiatulin
The data on US economy released on Tuesday was yet another proof that the Fed needs to raise rates in December. US GDP grew at a higher pace in the second quarter than expected. Inventories rose in August by 1 percent, reflecting the confidence of producers in improving consumer demand outlook. Curiously, GDP was resistant to a drop in inflationary pressures in the second quarter, but remained dependent on the labor market, which appeared to be the locomotive of growth this year.
The Fed realizes that "safe mode” of inflation targeting after years of massive quantitative easing means lack of tools during next recession that's why there is an urgent need to trust current GDP figures and normalize rates to get federal funds rate back to work. In October, the Central Bank planned to start getting out of the debt holdings, normalizing the overloaded balance sheet and conducting a small hike of 0.25% in December, as the economy allows it to be done. The Fed lowered long-term rates to 2.75%, so if the dynamics are good, the arrival to normal rates is likely to be done by the end of next year - mid-2019. Congress approval of Trump's tax plan will mean that the government will take away part of the Fed's work to stimulate the economy on its own, and a high level of consumer sentiment and confidence will guarantee a push in consumer demand from tax breaks.
The subject of concern is the scale of impact on the economy from two natural disasters - Hurricanes Harvey and Irma. In the next couple of months, inflation can easily exceed 2% due to the state help aimed at repairing affected regions. Sharply rising energy prices due to the shutdown of the refineries have made a significant contribution to the acceleration of inflation. There could be backlash after that and it is important that the Fed feel this moment and do not worsen the situation by policy tightening. Therefore, despite the accompanying wind in the form of growth in key indicators, the Fed may be cautious in December and smoothly translate market expectations into the February decision.
Japan’s moderate growth
The Japanese economy does not lag behind its leading world colleagues. CPI accelerated to 0.7% in August, industrial production is experiencing a rise due to the growth of foreign orders. Domestic consumption is still far from healthy shape - retail sales rose by only 1.7% in annual term. The dollar has slightly advanced against the yen but is not in a hurry yet, breaking through the July high of 113.00 allows hope for a further USDJPY rally providing that there is geopolitical calm. From levels above 113.0 it will be even easier for yen to bounce off on the news from North Korea.
Eurozone inflation
On Friday, data on inflation in the eurozone for September came out and unfortunately do not allow to build confident forecasts for the Draghi meeting in October. The target retreated by 0.1% to 1.5%, but consumer and investment sentiments suggest that the slowdown is temporary and that Draghi is about to cut back stimulus. EURUSD walks in aimless range, after going into a steep decline to 1.17 the pair quickly recovered from the hawkish Fed and returned to 1.18. Uncertainty is rising, but it's worth understanding that the ECB has to go a long way to tighten its policy while the Fed is almost halfway through, so the euro's room of growth is undoubtedly greater.
Arthur Idiatulin
This analysis is provided as general market commentary and does not constitute investment advice. Past performance is not indicative of future results
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