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FOMC members cautious about rates hikes as economy seen growing

Last week was marked by a number of important speeches from members of the Federal Open Market Committee of the Federal Reserve. The majority of presidents of regional Fed’s central banks underlined that Janet Yellen’s words concerning the “considerable” time period for raising rates is determined correctly; however, they would not mind to show the public more precise dates and improve communication. The global economy is seen growing, especially taking U.S. and South Asian regions, while Eurozone’s and Japanese economies have lack of momentum for the time being.

Among Fed Presidents, a FOMC member and the New York Fed President William Dudley spoke on Monday’s evening. Being one of the most insistent defenders of the stimulus program and low interest rate policy, Dudley said that changes are possible and they will depend on economic development. Moreover, he noticed that nowadays the monetary policy is working in a different way than it did in the past, meaning that more attention should be paid to the labour market. However, policy makers should find a balance between unemployment and inflation to make any significant changes to the monetary policy stance.

In Europe, economic growth in Ireland jumped to 7.7% in the second quarter of this year on the annual basis, while quarter-on-quarter it added as much as 1.5%. Strong exports and business investment pushed the country’s GDP up. On the other hand, ECB President Mario Draghi noted that economy of the whole Eurozone is losing momentum, even though data for July raised some optimism among economists. However, Mr. Draghi assured investors that the ECB will continue implementing new stimulus measures, including the second offering under the TLTRO program in December, as well ABS and covered bonds’ purchases. Last week, banks managed to raise 82.6 billion euro from the ECB. These funds are aimed to heat up inflation and economic growth in the region.

Along with its Eurozone’s, British and American colleagues, the Bank of Canada’s officials pointed out that country’s monetary regulator will most likely keep maintaining interest rates at low level for a prolonged period of time, even when economy returns to sustainable growth. The Great Recession left a number of structural problems in the economy, including falling employment, tougher regulation of the financial sector and high level of savings, meaning that consumers are still cautious in their behaviour and are carefully spending free funds.

Some negative sentiment was provides by the U.K., where public finances showed weak performance in August, as budget deficit reached 11.6 billion pounds, up 6.1% from the previous year. Therefore, during first five months of the current financial year the negative budget gap increased 6.2% on the annual basis to hit 45.4 billion pounds.

EUR

“In this case, there is a danger that private consumption would no longer fulfill its role as a key pillar of the German economy.”

- GfK

Consumer confidence level in Germany, the largest economy of the Eurozone, dropped for the second consecutive month in a row in October, as geopolitical crisis in Eastern Ukraine and sanctions from Russia are weighing on both consumer and business sentiment. The benchmark index for the upcoming month, calculated by the GfK research group, declined to 8.3 points from 8.6 points this month. The indicator is considered as important among economists, as it is based on survey of 2,000 consumers in Germany, when they are asked to give their assessment of economic conditions, overall economic situation and their personal financial situation. Among these sub-sectors, estimates on economy plunged further, down to 4.4 points from 10.4 points in August and 35.5 back in July.

At the same time, economists suggest that economy of Germany still remains in a very good condition, as some external weakness and geopolitical tensions are overlapped by record-low unemployment, rising wages and low borrowing costs. Some country’s employers, however, announced job cuts, after Russian counter-sanctions followed in August. Their business, however, has direct links with Russian market. Therefore, analysts do not expect the local economy to rebound considerably in the third quarter after the unexpected 0.2% decline in April-June.

USD

“After a very aberrant first quarter, growth is looking stronger for the balance of the year.”

- Credit Suisse Group AG

Economic growth in the United States was revised to the upside for second quarter of this year, as the pace of increase reached its largest level since October-December quarter of the year 2011. According to the final revision from Bureau of Economic Analysis, country’s GDP added 4.6% on a yearly basis, while earlier assumptions predicted a 4.2% advance. The revised number matched average forecasts of economists. Business investment increased as much as 9.7% year-on-year, while companies’ spending on equipment surged 11.2%. Household spending, in turn, expanded 2.5% and it accounts for 70% of U.S. economy. Revisions of these parts of the gross domestic product raised GDP by 0.35%, compared to previous data. Such a strong surge in output followed a 2.1% drop in the first quarter. As biggest American companies are positive on economic conditions in the U.S. in foreseeable future, they hire new workers, thus decreasing unemployment level, which is the second-important indicator for the Fed to adjust interest rates.

Additionally, the majority of experts are not expecting the U.S. economy to slow-down considerably towards the end of the year, as momentum is rather strong. GDP may climb around 3% in third and fourth quarters.

JPY

“The BOJ will have to ease policy next year, because inflation will not accelerate again.”

- Societe Generale Securities

Consumer price index in the world’s third largest economy declined further in August, as year-on-year prices’ increase reached 1.1%, not taking into account the rise in sales tax back in April of this year. Therefore, the indicator fell from 1.3% in July, hitting the 10-month lowest level and raising serious concerns about future of monetary policy in the country. Core CPI recorded the highest increase in April and since then started to decrease gradually. The Bank of Japan took extraordinary measures to heat up economic activity, growth and inflation, pumping funds into the real sector of Japanese economy. Also, economists mention that weaker Yen was not able to support increase in prices, which it should provide for imported goods, such as minerals and fuel. However, at the moment global energy prices are experiencing a period of stagnation or even decline. The latest data raises more questions about necessity of extra stimulus program in Japan. Moreover, it increases fears that the second advance of sales tax to 10% in the foreseeable future may push the CPI down even more. President of the Bank of Japan Haruhiko Kuroda does not exclude such an option, but estimates that inflation will return back closer to the 2% target towards the end of fiscal year in March 2015. A third of analysts predict the new support program to start working by the end of this year, while another 30% of them forecast the new money injections to take place around April of the year 2015.

CNY

“Targeted policy measures may provide some support in Q4, but the LEI does not point to a sustained pick up in the economy any time soon.”

- Conference Board

Economic activity in China continued to increase in August of current year; however, the pace of advance slowed from two previous months. The aggregate index, calculated by the Conference Board, rose 0.7% to 299.8 points last month, down from a growth of 1.2% in July and 1.3% in June, meaning that the world’s second biggest economy is experiencing issues with economic development. The index for China is based on six economic indicators, including housing, consumer expectations, exports orders, raw materials’ supplies, new loans and orders. Among them, real estate activity and consumer expectations declined slightly, while only three indicators registered a climb and positively contributed to the index. One more important indicator, which evaluates current economic conditions in China, is called Coincident Economic Index. It remained unchanged at 264.6 points in August after a 1% jump in both July and June, as surging retail sales were upset by falling industrial production. Therefore, analysts notice that there are mixed signals for China’s economy and development of next months may explain the situation better. Meanwhile, the government of China is preparing to take further actions to support GDP growth on present levels of around 7.5%, thus helping to improve leading indicators in the foreseeable future. However, Fitch Ratings agency says that Chinese economy is currently undergoing a period of rebalancing and country’s officials may refuse to add more stimulus to it.