US – Fed minutes contain some important indications

Eurozone industrial production – mixed development; downward trend in France continues

US – Fed minutes contain some important indications

Eurozone growth in 1Q14 (+0.2%) was unevenly distributed among the countries. While Germany (supported by a mild winter) performed well above expectations, France (0.0% q/q) and Italy (-0.1% q/q) burdened Eurozone growth. Since the German economy will quite likely lose momentum in 2Q14, the situation in France and Italy has to improve in order to avoid a weakening of economic growth in the Eurozone. Recently, financial markets reacted quite sensitively to the disappointing economic data. Therefore, it is very important to keep an eye on incoming data. For the time being, encouraging leading indicators for Italy and other peripheral countries point towards satisfying growth, with an accordingly positive impact on Eurozone growth. Ongoing weak leading indicators for France, however, pose downward risks for Eurozone growth in 2Q14.

This week, industrial production data for May for Eurozone countries has been published. In Germany, industrial production for the months April and May dropped on average by 1.5% when compared to 1Q14. This decline was mainly driven by the construction sector (-6.5% on average), after the latter has benefited in 1Q14 from the mild winter. The production of the automobile sector, which is important for Germany, thus far remained flat throughout 2Q14. In 3Q14, the situation should normalize in Germany. In France, industrial production for April and May declined on average by 0.9% when compared to the previous quarter, thus confirming the most recent disappointing survey data. Due to the already weak dynamic in 1Q14 (-0.6% q/q), the prolonged weakness is in our opinion quite problematic.

In Italy, industrial production declined on average slightly by 0.5% when compared to the previous quarter. However, recent survey data points to an improved situation for June. In Spain, industrial production for April and May rose on average by 1.1% when compared to 1Q14. For June, the survey data for Spain has been quite encouraging and points to a prolonged positive development during the month.

On July 24, flash estimates of manufacturing PMIs for July will deliver further insights regarding the status of Eurozone industry. The mean of the poll data for the entire Eurozone for 2Q14 remained above the growth threshold level of 50, but declined somewhat when compared to 1Q14.

The minutes of the most recent FOMC meeting contained some important indications concerning the mid-term implementation of monetary policy. Members discussed the appropriate time to end the reinvestment of the proceeds of the Fed’s security portfolio. Many participants favored an end to the respective commitment not before the first rate hike. So, it has become quite obvious that a phasing out of reinvestments will not be used to smooth the transition from the end of asset purchases to the first rate hike. Generally, the end of reinvestments was expected by the Committee to have limited implications for the macro economy.

The future implementation of monetary tightening was also discussed in further detail. As the massive security purchases by the Fed during the last years are mirrored by the bank’s excess reserves to the same magnitude, new tools are required. The high excess reserves are in the way of liquidity fine-tuning, which is necessary to steer the Federal Funds Rate.
Accordingly, the Fed will have to influence short-term money market rates through new tools. In this respect, an overnight interest rate on excess reserves will play a crucial role, likely supported by an overnight reverse repo facility, the latter firming the floor under money market rates. The discussed spread between the two was 20 basis points. Most members voiced the opinion that the Fed Funds Rate should continue to play a role in the Committee’s operating framework. All measures are still being discussed, but statements have become more concrete, pointing more clearly to the future developments. The Committee thought it useful to communicate its plans to the public later this year.