NIBC NV : Research: FOMC may blink as US economic data has weakened

25-01-2016 | NIBC Research

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Chart of the Week

The Chart of the week shows weekly jobless claims in the US and the S&P 500. Although the Eurozone economy seems to be growing modestly, still the US economy appears to be a bit more vulnerable this time. Already in the last few months of 2015 it became apparent that the US economy is facing a downturn in its manufacturing sector, which can be partly attributed to a strong US dollar and weak capital investments. As such, the Q4 2015 GDP report, which will be published on Friday, is expected to show that the US economy virtually stalled last quarter. Nonetheless, up till last month the weakness in economic activity was not yet visible in the labour market; job growth continued at a robust pace up till December. However, weekly jobless claims seem to have bottomed in December and are slowly climbing up over recent weeks. This could indicate that the pace of job growth may slow down going forward and that the unemployment rate may not improve any further.

Market Movers

• Turmoil in financial markets started at the 3 December ECB meeting when the ECB did not add as much liquidity to the markets via its QE programme as was expected by market participants, which resulted in a jump in the euro exchange rate of 3% and a sharp sell-off in the stock markets that day, particularly in Europe. However, the downward spiral may have come to a temporary halt following the ECB meeting of last Thursday afternoon 21 January.
• Draghi appeared to have lost his cool at the ECB meeting and issued desperate statements like 'the ECB will not be surrendering to global factors', to indicate his willingness to throw more gasoline on the fire. The question is what we should make of Draghi's comments. Although it seems possible that the ECB will cut the deposit rate further into negative territory, the only way to achieve a significant easing of policy is to step up asset purchases significantly. However, it is questionable if Draghi will get the leeway to expand the QE programme further and even then it is questionable if for example a 10bn or 20bn monthly increase in asset purchases will be able to alter the markets direction.
• There are still 6 weeks to go before the next ECB meeting (on 10 March) will take place and a lot may happen in between. For example, the bear market rally that we saw Thursday and received further impetus on Friday by dovish comments from that other central bank that has lost itself in monetary experimentation, the Bank of Japan, may continue in the coming weeks. However, even if energy prices rebound a bit more, it will unlikely alter the inflation outlook a lot. In that regard, it is also important to see if there are negative effects on the growth outlook for the Eurozone from the recent market turmoil.
• Meanwhile, in the US all eyes will turn to the FOMC meeting on Wednesday. It is generally expected that the Fed will be on hold. However, much more important will be its press statement afterwards. Given the fact that a loss of economic momentum will be reflected in GDP data (on Friday) and possibly also in labour market data (on Friday next week) it seems likely that if the Fed underlines in its statement that it is data dependent.

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