FOMC meeting will bring rate hike and new estimates for 2018 and beyond
|US - Markets waiting for new FOMC interest rate forecasts
US - Will the US Congress agree on a budget?
EZ - Slightly weaker industry sentiment expected for March
FOMC meeting will bring rate hike and new estimates for 2018 and beyond
The Federal Open Market Committee (FOMC) will next week decide upon its future monetary policy stance. A rate hike seems almost certain and is already entirely anticipated by the markets. As in every quarter, the latest survey among the committee members will also be released.
In contrast to the rate hike next week, the outcome of the survey is more uncertain. Committee members will be asked to give their assessment of the development of major macro variables, among other things the federal funds rate. At the last survey in December, the median estimate corresponded to three rate hikes for 2018. However, the environment has changed since then. While tax cuts had already been foreseeable in December, the announcement of large-scale public sector spending increases at the beginning of February came as a surprise. This is not negligible for the determination of monetary policy, as the fiscal stimulus, expected economic growth and thereby the inflation risks have risen. How the new risks will be assessed by the committee members will become visible next Wednesday. Further, former Fed chair Yellen will no longer attend the meeting. Impact on the outcome is unlikely, but possible in a universe of only 15 votes.
It is thus entirely possible that the median of given forecasts will go up and thus will end at four rate hikes this year in total. Currently, futures anticipate a probability of little more than 25% for a fourth rate hike this year, so it would not entirely be a surprise from the market’s perspective.
Still, we reaffirm our forecast of three rate hikes for the present year and also expect this to be the most likely outcome of the FOMC survey. The reason for that is not that the US economy could not withstand a fourth rate hike – it certainly could from our perspective, and we have long taken the view that the Fed proceeds too slowly. However, to change the median it would be necessary for at least four committee members formerly expecting three rate hikes to increase their estimates. Such a radical plan seems rather unlikely to us. At the same time, we reiterate that the risks for the development of the central bank rate this year are clearly tilted to the upside.
US Congress starts next attempt to agree on budget
Next Friday, the next deadline for the US Congress to agree on a budget looms once again. After the deadlines in September, December, January and February, the struggle to provide legislation for public expenditures right up until the last minute (and beyond) has already become a routine. However, it should be noted that the threshold of pain among the members of Congress has decreased in the process. In September, an agreement was reached a few weeks before the deadline, in December just in time and in January and February there were already limited shortterm suspensions of payments.
However, this time, the chances of reaching an agreement look somewhat better. In mid-February, both parties agreed on an expenditure framework for the next two years. What remains to be resolved is the allocation of the money. It even seems possible that the parties could agree on a budget until the end of September. The other already previously used option leaving the expenses unchanged and setting yet another deadline before or after partial suspension of payments occur - certainly remains on the table as well. In any case, as in the past, the markets likely will observe the political debate with composure. An escalation of the situation, which would trigger a reaction of the market, is hard to imagine at the moment.
Slightly weaker manufacturing PMI for March expected, global environment remains supportive
Next week (March 22), the first flash estimate of manufacturing PMI for March for the Eurozone, Germany and France will be released, In February, sentiment declined slightly; however, with an index reading of 58.6 points, it remained close to its historic highs. Even though the growth pace of new orders and production eased slightly, the growth pace of the Eurozone’s manufacturing sector remained robust. On the regional level, the Netherlands, Germany and Austria remained on top.
For March, we expect a slightly weaker reading for Eurozone industry sentiment. Nevertheless, the prolonged uptrend of commodity prices signals unchanged robust global demand. The global world trade outlook indicator from the WTO gained slightly in dynamics in 1Q18, signaling a continuation of the global trade upswing. In this environment we expect that the positive growth dynamics of Eurozone industry will continue and should in turn have a positive impact on the dynamic of investments in 2018. Overall, we forecast GDP growth of +2.4% for the Eurozone in 2018.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.