Economic Calendar US & SA macro-economic data week November 27
Posted on 28 Nov 2017
In the US, the week is marked by two key macro releases. The first is the preliminary or second print of US Q3 2017 GDP, with the other being the personal income and outlays report for October that will reveal movement in the core PCE Price Index. We expect a Q3 GDP number close to 3.0% because consumer and business spending are at very robust, above-trend levels. If anything we think the 2nd print could come in a little higher than the first at 3.1%. The Fed upgraded its assessment of the US economy, calling it “solid”. We see the US dollar, which has weakened a bit of late, making a mid-week comeback. Watch the GBP-USD cross in particular, for some movement. A good GDP read is historically associated with support for equities in general. Even though S&P500 constituents draw much of their revenue from abroad, US economic strength feeds into other markets as well via the trade channel.
Personal Income & Outlays are released on Thursday. Income and spending trends are quite strong. But, we are just not seeing these trends showing up in the Personal Consumption Expenditure Price Index at the headline and core level. It is the latter measure that is the favoured Fed inflation gauge. The core PCE PI edged up 0.1% in September, after inching higher also by 0.1% in August. The September rate of 1.3% was the same as in August, is far lower than core CPI, and is materially below the Fed’s 2.0% inflation target. We expect the core PCE PI to get up 0.2%, and rise to 1.4%. Anything above this number and the USD will gain traction, Treasury yields will rise a little, and equities probably fall somewhat on a recalibration of the expected trajectory for the fed funds rate. Conversely, a number of 1.3% or below will see the opposite reaction.
Three important FOMC member addresses will also be a feature of the week. NY Fed president William Dudley speaks on Tuesday early morning SA time, as well as later in the week. The address is important because Dudley’s views are very characteristic of the shift in opinion that is taking place on the FOMC. The principle point of division is whether various measures of inflation, but particularly the core PCE Price Index, are being held back by idiosyncratic (once-off) or at least cyclical phenomena or whether the problem is more deep-rooted in nature. We know from the minutes to the FOMC meeting November 1, that “many” meeting participants and probably a majority of Committee voting members, if not all, are concerned that with core inflation readings continuing to surprise on the downside. This ordinarily would not be a problem were the USD to be very strong or commodities very expensive, or resource slack in the labour market quite substantial. But these factors are simply not in play anymore.
Currently, four FOMC voters - Neel Kashkari, Lael Brainard, William Dudley and Charles Evans - hold reservations about whether inflation will rise to “moderate” levels around 2% in the medium term because of structural or secular inhibitors. The first two are already stating that the correlation between unemployment and wages (the Phillips Curve) is breaking down to a degree as to make the relationship largely irrelevant. The latter two are still hedging their bets. The majority agrees that the Phillips Curve is much flatter than it used to be, but that the correlation holds, and tightness in the labour market will eventually generate moderate levels of wage inflation. The minutes attribute the structural or secular argument to a “few” participants, probably more than three.
As we say, Dudley is straddling the two positions and his talk might give an indication of whether he is still prepared to give the FOMC majority a chance, at least until the new Fed Chair is sworn in, or whether he is inclined even now to side with the inflation dissidents. Watch out for any indication that Dudley thinks low inflation is a more permanent feature of the US economy. This would tend to indicate to us that this view is becoming more established on the Committee, although we think a rate hike of 25 basis points in the fed funds target range will occur in December and is already discounted.
On Wednesday, Fed Chair Janet Yellen testifies on the US economic outlook before a Congressional Joint Economic Committee. The most important portion of the testimony will be her answers to questions put to her. We know she is concerned about low inflation, and particularly subdued wage inflation. Expect Yellen to traverse recent inflation indicators, some of which have actually risen, but are still low by historical standards at this stage of the recovery. The key number in this regard is the Employment Cost Index (ECI) which is the broadest measure of labour costs, and is favoured by the Fed. It rose in Q3 2017 to an annualized rate of 2.5% from 2.4% the prior quarter, but with the US labour market apparently so tight, it should really be closer to 3.5%. We anticipate that she will say that the FOMC is still waiting on incoming data re inflation and wage trends, and the answer to the riddle of why inflation is so low in the absence of inflation inhibitors, is actually unknown at the present. There are possibly structural features at play, and also possibly some temporary features, as we have mentioned. It is all a bit of a mystery. But she will also mention that the US economy is on a solid footing, that financial markets have performed spectacularly despite policy normalization, which she will stress has been gradual, leaving the current policy orientation still accommodative. On economic growth, we would like to hear something on the hurricane effect on Q3 GDP, the number for which will be out earlier in the day. Will the US be able to maintain the current momentum into 2018? The inventory run-off from November through to year-end will deflate the Q4 2017 figures a little.
The key statement we want to hear is that Yellen is still convinced that with the US labour market set to tighten further, there will be a moderate pickup in wages, salaries and benefits, such as to take core inflation to the Fed’s 2.0% target in the medium term. She will probably confirm that recent economic and inflation developments do warrant a December rate rise. We just cannot see her being more hawkish than that, more particularly because she will no longer be in her job by February.
And on Tuesday, the Senate Committee on Banking, Housing, and Urban Affairs will hold a full committee hearing on the nomination of Jerome Powell to be Chairman of the Board of Governors of the Fed i.e. Fed Chairperson. Powell has been nominated by President Trump as a sitting member of the Fed Board for a four-year term starting in February 2018. He needs a majority in the Senate to seal his position. This meeting is basically a Q&A session on monetary policy and is preliminary to the Senate vote. But the later vote is a given, provided of course all goes well in this hearing, and we do not expect many dissents from Democrats. Powell is set to take over the reins at the Fed in February. He has been a member of the Yellen-led majority on the FOMC pretty much since her ascension to the position in 2013. He has never voted against the majority. His views on inflation are similar to those of Yellen, and he should provide policy continuity. Nevertheless, the Senate Committee hearing is important, because Powell is one of the least expressive members of the Fed Board of Governors. And we wish to ascertain whether his views on inflation have been updated and differ from the wait-and-see approach of predecessor Yellen.
In SA, we are looking for some early Q4 indicators of business confidence, as well as the release of the October trade balance. The RMB/BER SA BCI did increase by 6 points to 35 in Q3 2017 after plumbing depths not seen since 2009 in Q2 2017, at only 29. The initial Q4 reading will cover the aftermath of the presentation by Minister Gigaba of the MTBPS, which revealed a marked deterioration in fiscal conditions. One of the reasons why confidence built up a little in Q3 2017 was due to the absence of further unsettling political and policy events during the survey period. This will not be the case for Q4 2107. Political and policy concerns have heightened as the ANC’s Elective Conference in December draws nearer, amid weakening fiscal metrics, a downgrade to junk of South Africa’s rand-denominated debt by S&P and the apparent end to the policy easing cycle, such as it was, of the SARB. However, we expect the number to remain above 30 because the data set is incomplete. This will be the first measure of business confidence for the Q. Any reading under 35 will test the rand again. Consensus estimates point to a rise to 40.
SA’s trade surplus to end-September stood at a R47.1 billion surplus from a R6.7 billion deficit in the corresponding period in 2016. This has fed into a much narrower current account deficit, and is the main reason why the rand and SA bonds have led up relatively well despite the MTBPS and the S&P downgrade. We are looking for a small deficit in October, which will leave the YTD surplus down around R1 billion to R46 billion. This should elicit no material market reaction. The real deterioration is expected in November, by which time the rand had weakened materially and the oil price had strengthened. History has shown when oil goes up, and the rand down, import prices shoot up, and to the extent that input prices rise domestically, not much help is afforded exporters.
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