Strong US data keeps the pressure on the Federal Reserve - ING

James Knightley, Senior Economist at ING, suggests that US consumer confidence and industrial output continue to push on upwards, keeping expectations for Fed policy tightening elevated.

Key quotes

"The March provisional reading for University of Michigan consumer confidence shows the headline index rising to 97.6 from 96.3. This is above the consensus prediction of 97.0 and leaves the index close to cycle highs. The expectations component only rose two-tenths of a point, but the current conditions index rose to a level not seen in nearly 17 years. This all points to a household sector that is in excellent shape and which is likely to continue spending strongly. Oddly, inflation expectations dipped modestly despite the pick-up in all of the actual measured inflation series."

"This follows on from another strong industrial production report released a little earlier. Manufacturing, which makes up three-quarters of industrial output, rose for the sixth consecutive month – it was up a hefty 0.5%MoM for the second month in a row. The ISM manufacturing index suggests we should expect ongoing healthy growth given the strength in the new orders and backlog of orders series. In turn, this is likely to keep job growth firm, helping to support consumer sentiment."

"This is going to keep expectations for Federal Reserve policy tightening elevated, but we continue to be more cautious than the market in anticipating only one further rate rise this year. Both the Federal Reserve dot diagram and Fed funds futures point to two. We take the view that Congress might not be as forthcoming on the fiscal stimulus front as President Trump has been demanding while the Fed switching to balance sheet adjustment as a way of removing some of its stimulus (ceasing to reinvest maturing bond flows from its QE portfolio) is likely to push up longer dated yields. This should reduce the need for interest rate hikes at the short end."