Eurozone – GDP growth should accelerate slightly in 1Q 2017

US – FOMC meeting could disappoint markets

Eurozone – GDP growth should accelerate slightly in 1Q 2017

US – Government shutdown?

Probability of US interest rate hike in June has decreased after soft 1Q

The next meeting of the Monetary Policy Committee of the Federal Reserve (FOMC) is scheduled for next week. The decision and the statement will be published on Wednesday. There will be no press conference and the participants will not make any new forecasts for the most important macroeconomic variables. A change of key rates can practically be ruled out. Nonetheless, this meeting could bring motion into the markets.

The question for the upcoming meeting will be whether or not the FOMC will react to the significant slowdown of economic growth in the first quarter. Until now, there were no clear signals for the date of the next rate hike. However, the market predominantly expects a rate hike in June. We doubt this and think that, due to the weak economic data of the last months, the FOMC will wait for the time being. Therefore, we expect the next interest rate move to be in September. However, uncertainty is high. A lot of macroeconomic data will still be published by the FOMC meeting in June, which could steer the decision of the FOMC in one or the other direction. For us, the possibility of no rate hike in June prevails currently. Next week, the FOMC could already communicate in this direction, or keep all its options open and leave the wording in the statement more or less unchanged. The most unlikely outcome is that the market expectations for a rate hike in June will be reassured. This would be hard to argue, viewing the economic data for the last months. Thus, there is a significantly high probability that, next week, the interest rate expectations of the market will not be reinforced, and perhaps will be outright disappointed.

The FOMC statement could also contain hints on how the discussion about the end of the reinvestments of redemptions from the securities portfolio could develop. Most probably, however, the FOMC will wait with it until the next press conference of Chair Yellen, thus until June. Drawing on the protocol of the last FOMC meeting, a reduction of the reinvestments starting at the end of this year looks likely.

Eurozone – 1Q 2017 GDP growth should slightly accelerate to +1.9% y/y

Next week (May 3), a first flash estimate of GDP growth of the Eurozone in 1Q17 is to be released. In 4Q16, the Eurozone grew, mainly supported by strong investment growth, by +1.8% y/y. Export growth in 4Q16 accelerated as well. However, due to faster growing imports, foreign trade continued to weigh on the growth of the Eurozone. Except for Italy, all major countries contributed substantially to the growth of the Eurozone in 4Q16.
All main economic indicators performed quite strongly in 1Q17. We thus expect at least a slight acceleration of growth to +1.9% y/y. Consumption growth should remain stable, while we do not expect that investment growth will be able to keep its brisk growth pace from 4Q16 (+5.1% y/y). With regards to exports, we expect (in line with the global upswing) a further slight acceleration of growth (previously +3.8% y/y); thus, foreign trade should no longer weigh on the growth in 1Q17e. Since leading indicators improved further in April, our models currently indicate another slight acceleration of GDP growth for the Eurozone in 2Q17 to +2.0% y/y. For the entire year 2017, we continue to expect GDP growth for the Eurozone of +1.9%.

Can Republicans and Democrats agree upon the financing of the government functions?

Today is the deadline for the US Congress to agree on a continuing resolution to keep ministries and government agencies financed and running. Otherwise, a shutdown looms, ceasing payments. This would affect employees (they would be sent on unpaid leave) and suppliers. However, there is a difference between essential government services (to which the military and the police belong and which would not be affected) and the rest. The decision where the line will finally be drawn lies with the government. According to media reports, an agreement seems within reach. Thus, a short-term extension of the financing (1-2 weeks) would be possible, before a long-term solution would be found. The last time a shutdown occurred was in 2013 and it lasted 16 days.

The implications for the markets should be relatively small, and would nevertheless ultimately depend on how long the shutdown would last. The longer the payments would cease, the more likely an impairment of economic growth (in at least the second quarter) would be. Furthermore, a shutdown would once again be evidence of the inability of the US Congress to find majorities to make decisions.

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