US Economic Update – 22 February 2015
US retail sales miss estimates as FOMC minutes highlight policy maker concerns over disinflation
The key event for investors during the previous week was of course the release of minutes for the most recent FOMC meeting, which highlighted a more dovish stance among policy makers than the market expected.
Consequently, the release prompted a sharp correction in the US dollar as investors began to question the likelihood of a June rate hike from the FOMC.
In addition to FOMC minutes, markets were tentatively awaiting a last minute debt deal between Greece and its creditors, while also still digesting the earlier release of retail sales figures for January which missed estimates considerably.
While the last minute announcement of a four month extension to Greece’s funding program prompted markets to push higher ahead of the close, the earlier surprise to the downside from retail sales numbers has lead some to begin to fear that underlying economic growth in the US could be stalling.
Although it would appear on the surface that such concerns are warranted, particularly when considering the pace at which oil prices have collapsed over the last six months, and the consequent boost in consumer spending that this has been expected to deliver.
However, we note that while retail consumption fell during January, the household savings rate also posted a noteworthy increase at the same time (0.2%).
We take this as an indication that US consumer finances remain on the path of recovery, despite the downturn in consumption which is, in our view, likely the result of household preparations for changes in interest rates later in the year.
US economy remains on course for interest rate hike in Q2/Q3
We wrote earlier this week about our view of the current situation surrounding inflation in the UK and the US in the report titled; UK Economic Update – 22 February 2015.
Here we noted that while headline inflation measures remain under pressure in both countries, Core CPI inflation remains at an average of 1.5% and could still move higher in the coming months.
This leads us to believe that the current deflation panic is vastly overhyped in relation to the UK and the US, which now creates the potential for investors to be blindsided later in the year by a greater degree of hawkishness from policy makers than appears to be being priced in.
The below excerpt summarises our view. For further information please see the report titled: UK Economic Update – 22 February 2015.
“The net effect of the current UK & US inflation dynamic is a situation where investors could be broadly underestimating both the need for, and the resolve of policy makers in both countries to raise interest rates.
This creates the risk that investors could be blind sided later in the year by either the Federal Reserve or the Bank of England, while it also adds credibility to our expectation that Janet Yellen’s tone at this weeks testimony to the Senate Banking Committee and House Financial Services Committee could be less dovish than last week’s FOMC minutes have led investors to expect.
Further support for this expectation can be found by examining the implications of a strong January payrolls report, which was accompanied by a noteworthy increase in the household savings rate for the coming months.
As a result of this we conclude that Janet Yellen will likely reaffirm her view that disinflationary pressures are “transitory” this week, while citing a tighter labour market and the stronger financial position average households as reasons for why an interest rate hike remains on the cards.“
Key events for the week ahead
As referenced above, the key events for investors during the week ahead will be speeches from policy makers in the US and Europe, in addition to second estimate GDP figures for both the UK and the US. German CPI numbers are also due out at the back end of the week.
To summarise our expectations, we anticipate that Janet Yellen will sound a more hawkish tone than is currently priced into markets, while we also believe that Mario Draghi will do his best to add further weight to the ankles of the euro by emphasising the significance of the QE program which begins in March.
In terms of economic data, we believe that the risks of a downward revision to UK GDP are noteworthy, given the broad based slippage of economic barometers in Q4. We are neutral on the outlook for the second estimate US GDP number.
Dow Jones / 10 Minute Intervals
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