MacroScope http://blogs.reuters.com/macroscope Shining a light on the dismal science Thu, 27 Oct 2016 11:41:31 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 Solid UK growth pushes BoE rate cut off the table for now http://blogs.reuters.com/macroscope/2016/10/27/solid-uk-growth-pushes-boe-rate-cut-off-the-table-for-now/ http://blogs.reuters.com/macroscope/2016/10/27/solid-uk-growth-pushes-boe-rate-cut-off-the-table-for-now/#comments Thu, 27 Oct 2016 11:41:31 +0000 http://blogs.reuters.com/macroscope/?p=20196 A man cleans the tables of a beer garden on a sunny day in Munich's English garden 'Englischer Garten' March 16, 2012.   REUTERS/Michaela Rehle (GERMANY - Tags: ENVIRONMENT SOCIETY) - RTR2ZFPN

The likelihood the Bank of England cuts interest rates again on Nov 3 has been pretty much pushed off the table by official data showing the British economy has so far defied fears of a hit from Britain’s June 23 vote to leave the European Union.

A Reuters poll earlier this week had already predicted the central bank would stand pat next month, with only around a quarter of the 60 economists surveyed predicting a cut to Bank Rate, already at a record low of 0.25 percent.

Following Tuesday’s third quarter GDP numbers, which showed the economy expanded a much better than expected 0.5 percent last quarter, some of those economists have started changing their minds.

“Today’s data neatly summarise that there is no great urgency to increase stimulus, and we do not consider that a majority in favour of easing will coalesce at next week’s MPC meeting,” Lloyds Bank told clients.

Daniel Vernazza at UniCredit said something similar:
“The much better than expected print for 3Q GDP growth effectively removes the chance that the BoE will cut interest rates at its meeting next week.”

Chances of a November cut were already declining – in a Reuters poll taken ahead of the September meeting, 46 of 59 respondents had a cut pencilled in for Q4. Thirty-nine of those called out the November meeting specifically.

But that number came down in the latest poll to 17 predicting a cut at the November 3 meeting, a minority in the overall sample of 60 respondents.

The likelihood of a cut in November has also gone down to 35 percent in the latest poll from 55 percent in the September survey. Financial markets are pricing in a much lower chance of that happening.

But not everyone was convinced solid growth in Q3 was enough to stop the Monetary Policy Committee from cutting.

“RBC still forecasts a cut in Bank Rate at the November MPC meeting from 0.25 percent to 0.10 percent. We accept the decision isn’t clear-cut though and subtle shifts in judgement by certain MPC members could cut both ways,” said Sam Hill at RBC.

Economists at Credit Suisse, while expecting no rate cut next week, also warned the strength would not last.

Even though Q3 GDP surprised to the upside, the details reveal that the strength was driven by the domestic services sector. This is at risk in the future as the weak pound is likely to contribute to rising prices and squeeze real wage growth and consumer spending. Moreover there are no signs of the weaker currency boosting manufacturing so far, with prices of exported sterling-priced goods actually rising. In our view the outlook for 2017 growth is still subdued. 

– With reporting by Sumanta Dey

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Under pressure, U.S. Federal Reserve takes baby steps toward a more transparent and inclusive era http://blogs.reuters.com/macroscope/2016/10/19/under-pressure-u-s-federal-reserve-takes-baby-steps-toward-a-more-transparent-and-inclusive-era/ http://blogs.reuters.com/macroscope/2016/10/19/under-pressure-u-s-federal-reserve-takes-baby-steps-toward-a-more-transparent-and-inclusive-era/#comments Wed, 19 Oct 2016 19:42:35 +0000 http://blogs.reuters.com/macroscope/?p=20181 diversity.jpgLast year’s behind-the-scenes selection of three men with ties to Goldman Sachs to serve atop the Federal Reserve did not go over well with outspoken civic groups and many Democrats, including Hillary Clinton, who have all called for a more transparent and inclusive central bank. In response to the critics, the Fed has rolled out a series of announcements, online forums and face-to-face meetings with Americans to portray a more open process of selecting its 12 district presidents that is also more sensitive to racial and gender diversity.

The Minneapolis Fed, like its counterparts in Philadelphia and Dallas last year, named a president in Neel Kashkari with a past at Goldman, the Wall Street bank. But it also broke ranks from others when it released video testimonials from directors shedding light on the year-long search process, and even published a “summary of attributes” sought in the candidate. The Atlanta Fed said last month it seeks a “diverse set of candidates” to replace outgoing chief Dennis Lockhart, and this month its board chair hosted a pubic webcast to explain the historically shrouded search process, raising hopes it would name the first black or Latino Fed president in the central bank’s 103-year history.

“In the Federal Reserve system we are taking this very seriously, but it’s not just because we want to go and say we’re diverse,” Loretta Mester, the Cleveland Fed President, told a gathering of low-wage workers and progressive economists organized by Fed Up, a labor-affiliated coalition of civic groups pushing for reforms. “It really is about … getting different view points that are very helpful to us in setting policy and thinking about the economy and understanding the trends,” she said at the Cleveland Fed on Friday. Mester met the group a day after her bank launched an online application form for the public to recommend people “diverse in backgrounds and perspectives” for board positions and advisory roles across her Midwest district. Asked to what extent outside pressure prompted the move, a spokeswoman said it was “just the latest in our ongoing efforts to broaden our outreach.”

The 12 Fed presidents have five rotating votes on U.S. interest rate policy. Unlike the five current governors at the Fed Board in Washington, who are selected by the White House and approved by the Senate, the presidents are chosen by their district directors, half of whom are themselves picked by private local banks that technically own the Fed banks. The dizzying structure is meant to ensure views from across the country are heard. But critics say it leaves the Fed beholden to bankers who are not representative of the public, and they point out that 11 of 12 district presidents are white while 10 of them are men. Among employees at the Fed Board in Washington, including service workers, 43 percent were non-white and 43 percent female last year. However at the executive level it was 18 percent and 37 percent, respectively, according to the central bank.

Clinton, the presidential candidate, has come out in favor of dropping bankers from district boards and making the Fed “more representative of America as a whole,” according to her party’s platform. That followed a May letter from 127 lawmakers to Fed Chair Janet Yellen urging more diversity.

After years of resisting more overt political efforts to curb its independence, the Fed under Yellen appears willing to take small steps in the name of transparency and inclusively. In an unusual entry in minutes of their meeting last month, Fed officials discussed a staff analysis of “differential patterns of unemployment across racial and ethnic groups.” U.S. unemployment among blacks is twice that of whites.

“While we applaud this progress, these very basic steps were available to them for the last hundred years and have only been rolled out very recently,” Shawn Sebastian, a Fed Up field director, said of the series of efforts by Fed banks.

In its latest critique, Fed Up called it “disappointing” that Nicole Taylor, a black woman and dean of community engagement and diversity at Stanford University whose term as director at the San Francisco Fed is soon to expire, would be succeeded on that district’s board by Sanford Michelman, a white man who is co-founder of law firm Michelman & Robinson LLP. John Williams, president of the San Francisco Fed, told reporters on Wednesday that while he has no control over the selection of directors, this board revamp “just redoubles my efforts and my team’s efforts to make sure that we are getting the voices and experiences from across the spectrum.” He added: “It’s definitely a step back in terms of what I’d like to see on our board. We’re working actively to build representation of women and minorities.”

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Merkel’s “mea culpa” and what comes next http://blogs.reuters.com/macroscope/2016/09/20/merkels-mea-culpa-and-what-comes-next/ http://blogs.reuters.com/macroscope/2016/09/20/merkels-mea-culpa-and-what-comes-next/#comments Tue, 20 Sep 2016 12:37:51 +0000 http://blogs.reuters.com/macroscope/?p=20173 merkelblog.jpgTo people (like me) who have gotten used to hearing the same catch-phrases from Angela Merkel in speech after speech, her appearance on Monday was a surprise — perhaps one of the biggest since she became chancellor 11 years ago. Leaders don’t like to admit mistakes. But Merkel not only took responsibility for the poor performance of her CDU in an election in the city-state of Berlin, she also conceded that she would have handled the refugee challenge differently if she could go back in time. She was not apologizing for opening German borders a year ago. That would have been a step too far. But she was admitting that she failed to heed warning signs that a wave of refugees was building and to act early enough to counter or control it. She told her audience that she was ditching her signature phrase “wir schaffen das” (we can do this) because some people viewed it as a provocation. Her body language was different. She read from a prepared speech for nearly 12 minutes. This was a carefully orchestrated mea culpa.

Why? For one, Merkel was under mounting pressure within her own party to change the way she communicated about the refugee issue. One CDU official described her rhetoric in the refugee crisis as “technocratic”. “It’s a language people don’t understand,” he said. This had to be corrected and Monday was a first attempt to do so. It was also the clearest attempt yet to reach out to her Bavarian sister party, the CSU, and its leader Horst Seehofer, who has been attacking Merkel and her refugee stance publicly for a year now. While her aides seethed, Merkel responded to Seehofer with the political equivalent of Muhammad Ali’s rope-a-dope. She hunkered down and took the blows, hoping Seehofer – like George Foreman in Kinshasa – would punch himself out. But the attacks have not stopped and time is running out. In December, Merkel must say whether she plans to run for a fourth term in 2017. In order to run, she needs the CSU on board.

What happens next? One official familiar with the chancellor’s thinking told me that the standoff between Merkel and the CSU must be resolved “within the next few weeks”. The CDU and CSU are holding half a dozen policy-focused meetings over the next 6 weeks — an attempt to agree on common themes for the looming election. In early November, the CSU will hold its annual party congress. The fight must end if Merkel is to attend. The official made clear that the chancellor’s overture on Monday amounted to a final offer to the CSU. “She went quite far. She reached out to her critics. But there are limits. She can’t go any further,” the official said. Merkel will not bow to pressure to introduce a numerical cap — Seehofer has proposed 200,000 — on the number of refugees Germany lets in each year. That would be political suicide.

Does Merkel want to run again? Guenter Bannas, a veteran reporter with the Frankfurter Allgemeine Zeitung, wrote last week that she may not. But her appearance on Monday suggested otherwise. And a second German official who is close to her also told me on Tuesday that it should be clear to everyone by now that she wants another term. “It would be irresponsible for her to throw in the towel now. She has an obligation as leader of her party. She will do it again. I would bet money on this.”

Still, it may be too early to consider this a fait accompli. There may not be any obvious alternatives to Merkel in her CDU. But because she is so closely tied to the refugee influx in the minds of voters, she is especially vulnerable to events on the ground over the coming months. More attacks with a link to refugees, a repeat of the assaults in Cologne on New Year’s Eve or an acceleration of migrant flows into Europe could scupper her plans. Still, after her mea culpa on Monday, the chances that Merkel makes peace with her Bavarian partners and runs again have, if anything, increased.

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No big change yet to outlook for slow-burn UK Brexit vote pain http://blogs.reuters.com/macroscope/2016/09/16/no-big-change-yet-to-outlook-for-slow-burn-brexit-pain/ http://blogs.reuters.com/macroscope/2016/09/16/no-big-change-yet-to-outlook-for-slow-burn-brexit-pain/#comments Fri, 16 Sep 2016 16:01:23 +0000 http://blogs.reuters.com/macroscope/?p=20153 RTSIWCQContrary to now widely-held belief, the rather poor outlook for the UK economy since the country’s vote to leave the European Union on June 23 has barely changed.

The consensus view based on forecasts collected in Reuters polls before the referendum was that if British voters decided to leave the EU, the economy would go from steady, solid growth into a mild recession rather quickly.

This was based on the uncertainty around trade and investment conditions stemming from what was then an assumption, based on a promise by then-Prime Minister David Cameron, that the government would immediately take the first step toward separating from the EU after a vote to leave it.

There has been plenty written since about “doom-mongering” and “Armageddon” forecasts by economists over the impact of the Brexit vote. But the vast bulk of them did not make predictions of this sort at all.

In the Reuters poll taken after the referendum, the median forecast was for a 0.1 percent contraction in the current quarter, followed by another similar contraction in the last three months of the year. That has since been upgraded to no growth in the current quarter and 0.1 percent growth in the fourth.

Here is a chart of the median forecast for Q3 2016 collected in Reuters polls over more than a year.

UK GDP Q3 2016

It is difficult to overemphasise just how routine and miniscule these changes on the lower right side of the chart are compared with the drop from the steady 0.5-0.6 percent quarterly growth forecasts made before the referendum — forecasts made on the assumption Britain would vote to stay in the EU.

And that is what’s behind the problem with all the “doom-mongering” claims.

While the difference between a forecast for 0.5 percent quarterly growth and 0.1 percent contraction is immense – indeed, these kinds of changes in collective thinking taken just weeks apart only ever happen after cataclysmic events like financial crises – a forecast for 0.1 percent quarterly contraction is not in and of itself remotely apocalyptic.

Nearly three months on since the referendum, with no concrete plan from the government or the EU on what each will seek from divorce and how soon this may even proceed has led several banks to upgrade their near-term outlook for the British economy.

This is entirely reasonable. Apart from a plunge in commercial property turnover and prices, a huge spike in import costs for manufacturers owing to the drop in sterling, and a dive and then rebound in business confidence, the economic data haven’t been all that bad.

Accordingly, the probability of a recession in the coming year collected in Reuters polls has fallen to a still not-insignificant 35 percent in the September poll from 60 percent in July.

But that is more of technicality based on the fact that a recession is measured by two successive quarters of shrinking GDP than a sea change in sentiment over the implications of actually leaving the EU.

The widespread view remains that once the government triggers Article 50 of the Lisbon Treaty which orders a two-year stopwatch start on separation negotiations, the economy will feel more pain, but gradually, not in some kind of sharp shock. The latest forecast is for just 0.7 percent growth next year, compared with expectations for steady growth above 2 percent before the vote.

UK GDP 2017

Satirical news website the Daily Mash summed up the all the ink spilled in the British media touting the view everything’s going to be fine perfectly with its headline: “Lack of Brexit effects prove Brexit has not happened.”

Barclays economists upgraded their near-term view on the UK economy on Friday, as several other banks have done in recent weeks. But they also made clear that this was not sounding the all-clear (emphasis from Barclays):

The changes to our forecast today do not alter our view that the UK is heading into a recession and we continue to expect negative quarterly growth in four out of the next six quarters. We continue to believe in a shallow but prolonged recession ahead, driven by investment contraction in the short term and a slowdown in domestic consumption in the course of next year.

Barclays, like many other banks, still expect further stimulus in the form of even lower rates from the Bank of England, as well as fiscal easing from the government in the Autumn statement.

This is to say nothing of the dramatic turnaround in BoE policy — going from focusing on the timing of a rate hike owing to expected inflation pressures from a hot labour market and rising wages to slashing rates and announcing an intent to purchase tens of billions more of government bonds for its previously dormant asset purchase programme.

Barclays analysts call the coming UK recession a “slow fuse.” Others have called the coming pain a “slow burn.” A technical recession may not even happen, at least not for a while.

But Britons will feel the pain from going from expectations for a steady 0.5 percent growth pace over a prolonged period with steady hiring and wage gains to one closer to no growth. It’s just that, like how the divorce will proceed and when, nobody really has any details yet.

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Brazil’s currency outlook may be brighter than politics suggest http://blogs.reuters.com/macroscope/2016/09/01/brazils-currency-outlook-may-be-brighter-than-politics-suggest/ http://blogs.reuters.com/macroscope/2016/09/01/brazils-currency-outlook-may-be-brighter-than-politics-suggest/#comments Thu, 01 Sep 2016 15:30:39 +0000 http://blogs.reuters.com/macroscope/?p=20137 The rising sun over Copacabana beach is reflected in a window in Rio de Janeiro, Brazil, August 23, 2016. REUTERS/Christian Hartmann - RTX2MO9G

The rising sun over Copacabana beach is reflected in a window in Rio de Janeiro, Brazil, August 23, 2016. REUTERS/Christian Hartmann

Disappointment over the progress of an ambitious reform agenda by Brazil’s new President Michel Temer will probably be insufficient to cause another massive fall in the currency, even though it could rekindle market volatility and kill chances of any credit rating upgrades, a Reuters poll suggested on Thursday.

The daunting task ahead of Temer is no secret to anybody. With popularity rates nearly as low as former President Dilma Rousseff, and seen by many Brazilians as the product of a coup, Temer has vowed to approve pension and labor reforms and freeze government spending growth for 20 years.

There are “significant hurdles” for that agenda to be implemented, ratings agency Moody’s said today, in an apparent understatement of the challenges in dealing with a fragmented Congress with just two years to go before the next elections.

However, currency strategists polled by Reuters are increasingly convinced the Brazilian real is still likely to hold ground in coming months, or even add to its 20-percent gains so far this year against the U.S. dollar.

The implications of a stronger currency are twofold.

On the one hand, it would slow down a much-needed economic recovery by reducing the competitiveness of Brazilian goods and services. The real is already dragging growth down: gross domestic product data on Wednesday showed imports growth outpaced exports in the second quarter and helped keep Latin America’s largest country mired in a brutal recession.

On the other hand, currency gains would help the central bank cut interest rates from the current 14.25 percent, their highest in a decade, by reducing inflation.

Policymakers implicitly acknowledged the importance of the exchange rate for monetary policy in their post-meeting statement on Wednesday by conditioning future rate cuts to the level of market confidence in the implementation of economic reforms in Brazil. Between the lines, the reference to confidence was a reference to the dollar – the classic safe haven that comes to affect prices in Brazil whenever risk perception is up.

What currency strategists are saying is basically that, barring a complete failure by Temer, the exchange rate will probably remain around where it is now, between 3.20 and 3.50 reais per dollar, or even head towards the 3.00 threshold. That is a long way from above 4.00, seen not so long ago.

Gabriel Gersztein, currency and interest rate strategist at BNP Paribas for Latin America, has a long list of reasons to be bullish on the real, most with nothing to do to politics:

  •  High interest rates: even if the central bank cuts the benchmark rate to around 10 percent next year, as most expect, they will still be among the world’s highest, making short positions too expensive to be carried for long;
  • Trade balance: 2016 has seen record monthly surpluses as the recession reduced imports. The market consensus for the year as a whole projects R$50 billion dollars to come to Brazil via trade this year, regardless of market swings;
  • Foreign investment: companies are already stepping up purchases of machinery and equipment to renew their production lines after the recession and prepare for the modest recovery ahead. Many of them are foreign, such as Renault and Albaugh.
  • International reserves: at nearly $400 billion, they proved to be more than sufficient for Brazil to weather severe crises, and will probably help assuage investors fears. Their size has no parallel in the region – Mexico, with a much smaller buffer, has had to resort to an IMF credit line.
  • End of a perfect storm: Brazil faced not only its worst recession in generations in 2015; it also saw commodities prices tumbling, had successive ratings downgrades, suffered along with other emerging currencies with a Chinese devaluation.

“We’re now seeing some elements that lead us to believe that the worst is over and we are close to a turning point,” Gersztein said.

Brazil’s huge economic problems are likely to remain around; but, as things stand, a currency rout should not be another one of them.

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UK inflation is about to take off – but by how much? http://blogs.reuters.com/macroscope/2016/09/01/uk-inflation-is-about-to-take-off-but-by-how-much/ http://blogs.reuters.com/macroscope/2016/09/01/uk-inflation-is-about-to-take-off-but-by-how-much/#comments Thu, 01 Sep 2016 09:03:22 +0000 http://blogs.reuters.com/macroscope/?p=20124

Lurking beneath the surprisingly strong rebound in manufacturing shown by the latest Markit/CIPS PMI, there were clear signs that inflation is about to shoot higher –and perhaps in a big way.

The survey’s input prices index, which gauges changes in the average price of goods purchased by manufacturers, rocketed five points in August to 67.1 – its highest since May 2011 and fuelled by the pound’s plunge since June’s Brexit vote.

While the PMI adds to evidence Britain’s economy has avoided an immediate hit from the vote to leave the EU, it also confirms economists’ worries about the longer term:  higher inflation will eventually hurt consumer demand, one of the few pillars of economic growth.

The PMI’s input prices index has a decent correlation with consumer price inflation about five or six months later.

A quick read-across from the current level of the input prices index suggests consumer price inflation could top 3 percent next year, although the headline rate of inflation is starting from a much lower base than in 2008 or 2011.

What is crystal clear, however, is that the weak pound – still down about 12 percent against the dollar since the referendum – is only just starting to feed through into inflation.

The composition of the official measure of producer input price inflation has already shifted, and is now being driven by the cost of imported goods.

Figure K- Input PPI inflation and contributions to the input PPI annual rate, 2014 to 2016

Chart credit: Office for National Statistics

The PMI’s input prices index has jumped more than 14 points in the last three months, a run matched only once in the last 10 years, and it shows no sign of slowing down.

The consensus of economists polled by Reuters last month showed inflation looks set to rise to 2.4 percent around this time next year, from 0.6 percent this July.

That would wipe out the real wage gains that British workers have only just recently won back after years of decline.

Those institutions forecasting inflation north of 3 percent – Fathom Financial Consulting and Nationwide Building Society – will be feeling pretty confident right now.

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Soon time to tick the U.S. full employment box? http://blogs.reuters.com/macroscope/2016/08/31/soon-time-to-tick-the-u-s-employment-box/ http://blogs.reuters.com/macroscope/2016/08/31/soon-time-to-tick-the-u-s-employment-box/#comments Wed, 31 Aug 2016 16:11:24 +0000 http://blogs.reuters.com/macroscope/?p=20102 An autograph-seeker convinces U.S. Federal Reserve Chair Janet Yellen (C) to sign copies of a picture of herself with U.S. President Barack Obama, after her testimony on the economy before the Joint Economic Committee, on Capitol Hill in Washington May 7, 2014. Yellen said on Wednesday the U.S. economy was still in need of lots of support from the central bank given the "considerable slack" in the labour market, and she cited weakness in the housing sector as a fresh risk. REUTERS/Jonathan Ernst (UNITED STATES - Tags: POLITICS BUSINESS) - RTR3O6L5

Most signs are pointing to another strong set of U.S. jobs data, even if wage inflation still hasn’t picked up in the same way.

Now that Federal Reserve Vice-Chair Stanley Fischer has made it clear the central bank’s employment mandate has nearly been met, a solid set of data on the job market in August, due on Friday, could make a September interest rate rise look more likely than anyone now expects.

Seven of the top 10 most accurate forecasters for non-farm payrolls in Reuters Polls over the past year are forecasting a number higher than the already solid 180,000 median. And of the 19 Wall Street primary dealers who responded, 16 also expect a figure higher than the consensus.

Societe Generale is forecasting 255,000 jobs were created, matching July’s blowout tally, but no one in the sample of 91 ventured for anything higher.

US NFP Aug

The spread between highest and lowest forecast is relatively wide at 130,000, but only just a bit more than the margin of error on the actual data.

Plotted over the last several years, this latest run doesn’t particularly stand out, either.

US NFP Aug

But with many now saying that just meeting the consensus may be enough to tick the full employment box, it seems like a much surer bet the data, at least on jobs, are where the Fed wants them to be and that a move in September is possible.

The main challenge, as ever, is the inflation component of its two-part target remains stuck below 2 percent. Core PCE has been stuck at 1.6 percent for a few months now, with inflation expectations among the general public as well as in markets going nowhere.

US PCE July

Average hourly earnings data in the employment report aren’t likely to do much either. The Reuters poll suggests only a 0.2 percent rise in August, less than the 0.3 percent in July. Half of the top 10 forecasters on this measure expect either just a 0.1 percent monthly rise or no rise at all. That would bring down the annual rate, last measured at 2.6 percent. 

— with analysis by Shrutee Sarkar

 

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Central bankers all off to Jackson Hole but U.S. inflation still going nowhere http://blogs.reuters.com/macroscope/2016/08/25/central-bankers-all-off-to-jackson-hole-but-u-s-inflation-still-going-nowhere/ http://blogs.reuters.com/macroscope/2016/08/25/central-bankers-all-off-to-jackson-hole-but-u-s-inflation-still-going-nowhere/#comments Thu, 25 Aug 2016 11:59:33 +0000 http://blogs.reuters.com/macroscope/?p=20086 As central bankers gather at Jackson Hole and every investor waits on the edge of their seat for a clearer signal on the direction and future of Federal Reserve monetary policy, one thing has remained fairly constant.

While there are plenty of reasons to believe it may be about to take off, U.S. inflation appears to be going nowhere.

Consensus expectations from Reuters polls of economists over the past year and a half on core PCE, the Fed’s preferred measure, have not budged more than one-tenth of a percentage point. Core PCE is forecast at 1.8 percent this year, next year and the year after.

The highest forecast polled for core PCE by any participant in the latest survey was 2.5 percent, and not until end-2017.

Core PCE prices

The lowest draws a flat line at 1.50 percent, with the consensus stuck in a steady 1.7-1.9 percent range through until the end of next year.

While hardly a disaster, expectations are not crying out for a succession of rate rises to get inflation under control, either. Instead, inflation is around where the Fed likes it to be.

The main problem is that the Fed, which has already pretty much ticked the full employment box of its dual mandate, isn’t comfortable with the idea of facing the next economic downturn with a federal funds rate that’s still so close to zero. It won’t have anything substantial to cut.

But the Fed has its work cut out for it trying to tick the second box. Inflation has been stuck in a well-established pattern for a very long time and most measures of inflation expectations are telling the same story.

As pointed out in the MacroMan blog, there have been only two months since the start of the millennium that the 10-year average of core PCE has risen above 2 percent.

10y and pce

That will turn at some point of course. It just might not be soon.

— with analysis by Shrutee Sarkar

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What happens in Shenzhen… http://blogs.reuters.com/macroscope/2016/08/19/what-happens-in-shenzhen/ http://blogs.reuters.com/macroscope/2016/08/19/what-happens-in-shenzhen/#comments Fri, 19 Aug 2016 15:01:44 +0000 http://blogs.reuters.com/macroscope/?p=20070 …could one day become Tencent.

tencent

For a full size chart, click here

The Chinese internet giant is at the cusp of becoming the country’s most valuable firm. Its mighty rise has taken its valuation to $250 billion, second only to China Mobile, and well ahead of the large state-owned banks and oil companies that have dominated China’s capital markets for the better part of the past decade. The rise of a Shenzhen-based, private company at the crossroads of internet technology, social media and gaming reflects several changes under way in China.

Firstly, the private sector is clearly where investors expect the next leg of China’s growth spurt will come from. Capacity cuts in the so-called “Old China” segments of the economy are a key focus of the central government as it tries to wean local governments from their heavy reliance on fixed asset investments for growth. While skepticism about the intent of local governments to enforce capacity reductions is high there is evidence that progress is being made. The bott0m-line is that the marginal growth will come from sectors such as technology, new energy and consumption — a lot of which are dominated by private enterprises.

Secondly, the rise of Tencent captures the shifts in consumer behaviour in China. Its WeChat platform brings together social media, online shopping and mobile gaming, making it a one-stop shop for millions of people in China. In its results this week, Tencent said it was up to more 800 million monthly average users — that’s nearly thrice as much as Twitter. The question raised is whether Tencent’s social platforms are hitting a saturation point. Even if that were so, the amount of data it collects on consumer behaviour and its aggressive foray into gaming and acquisitions in other markets like India suggest there might be more juice left. After all, at roughly 32x forward earnings the stock trades close to its average P/E of 28x since listing in 2004.

Thirdly, it puts the Shenzhen-HK connect under a new light. The reaction to China finally approving the trading link between the Hong Kong and Shenzhen exchanges was decidedly lukewarm. That may have something to do with the tepid performance of the Shanghai-HK connect so far and the general apathy among global investors for China. However, the mood is slowly changing. And Shenzhen is where most of the high-risk, high reward stocks that might pique the interest of foreign investors in China are listed. Not all investors are sitting idly by. In fact, one could argue that the buyside is far better prepared this time around. At a time of sluggish hiring in London’s financial services industry two large asset managers have added Mandarin speakers to their investment teams over the past 6-12 months specifically tasked to conduct in-house research on A-share companies. Brokers have taken Shenzhen-listed companies on non-deal roadshows to packed schedules in New York and London. As a stock picker the prospect of finding the next Tencent in China is not one to ignore lightly.

 

 

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Are British shoppers brushing off Brexit and splashing the cash? http://blogs.reuters.com/macroscope/2016/08/17/are-british-shoppers-brushing-off-brexit-and-splashing-the-cash/ http://blogs.reuters.com/macroscope/2016/08/17/are-british-shoppers-brushing-off-brexit-and-splashing-the-cash/#comments Wed, 17 Aug 2016 15:15:53 +0000 http://blogs.reuters.com/macroscope/?p=20052 Shoppers cross the road in Oxford Street, in London, Britain August 14, 2016. Photograph taken on August 14, 2016.   REUTERS/Peter Nicholls - RTX2L5JV

British retail sales figures for July could pleasantly surprise economists after data on Wednesday showed the country’s labour market performed much better than expected in the month after the Brexit vote.

According to the median in a Reuters poll, household spending, a pillar of Britain’s economy, was 4.2 percent up in July compared to the year before but the highest forecast was for a 5.2 percent jump.

“While it is too early to assess, the initial indications suggest that investors may be a bit too pessimistic about the prospects for consumer spending in the UK post-Referendum,” Barclays, who along with two other banks has the highest forecast, told clients.

In the five weeks to July 2 sales dropped by 0.9 percent and forecasts for last month were wide, ranging from a 1 percent fall to a 1.2 percent increase. The median was for a 0.2 percent pick up.

Weather, often labelled a key factor affecting sales, was to blame for June’s biggest monthly drop since the end of 2015 rather than the European Union membership referendum, stores said, and early indications suggest the vote has yet to stop people spending.

Sales promotions and July’s good weather outweighed concerns Britain’s vote to leave the EU on June 23 would deal an immediate hit to the economy, according to the British Retail Consortium.

It reported last week retail spending in July was 1.9 percent higher than a year earlier and British shops including Tesco, Next and John Lewis say they have so far not been affected by the shock referendum result.

Retail sale

A survey by card company Visa, published earlier this month, also said spending picked up in July.

The number of people claiming unemployment benefit in Britain unexpectedly fell in July. Benefit claimants fell by 8,600 in the month, compared with an increase of 900 in June, and there was only a small fall in the number of jobs employers were trying to fill, the Office for National Statistics said on Wednesday.

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