Macroeconomic update: Fed halts tightening, grim data from Europe

Summary:

• Federal Reserve halts tightening, Norges Bank hikes rate
• Data from the UK overshadowed by Brexit developments
• PMIs disappoint once again

Central banks dominated the week

This week has been dominated by central banks with the Fed’s decision being a cherry on top. The Fed surprised markets and decided to halt monetary tightening at least until the next year when it sees a possible one rate hike. However, in our eyes the odds for such a move could fall to virtually zero if no rate hike is delivered during the second half of this year. On top of that, the central bank announced it would stop selling Treasuries from its portfolio beginning in October. In the meantime, the Fed will reduce the pace of its holdings of Treasuries to $15 billion from $30 billion per month. All in all, the message sent by the Fed was dovish, and as a result the US dollar seems to have lost its big advantage (higher rates on the horizon).

Apart from the Fed’s rate decision we also got several other statements including Switzerland, the UK and Norway. The first two banks did not surprise as neither decide to change its monetary policy settings. It is worth noting that the SNB did lower its inflation projections once again. In turn, the hawkish communique was conveyed by the Norges Bank. The Scandinavian central bank hiked rates (the second move in this cycle), revised its GDP and CPI projections up for this year and announced that more hikes could be needed later this year. As a result, the NOK strengthened and it seems that this currency is in the best position to continue such a move over the next months.

The US dollar index (USDIDX) seems to be en route to lower levels given the macro outlook. The price drew a bearish engulfing last week and it has not been able to break above the top of this pattern so far. Thus, we suspect the pace of a decline could gather momentum once the price leaves the upward channel. Source: xStation5

UK data taken with a grain of salt as Brexit draws attention

A bunch of data we have been offered in recent days have not had a material impact on the British currency. The reason is simple and well known - Brexit. As we wrote earlier today, the EU approved a UK’s request to extend a deadline at least to April 12 or even to May 22 if the UK Parliament votes in favour of the May’s agreement next week. The pound slumped on Thursday and recovered to some extent thereafter. Nevertheless, there is no doubt that this topic is likely to affect the pound over the coming days.

The cost of hedging against the GBPUSD slump over the next month surged on Thursday. Source: Bloomberg

In terms of data, the positive outlook came from the labour market from where we got another encouraging wage growth (3.4% YoY excluding bonuses during the three months through January). Having subdued productivity growth the higher wage growth exerts upward pressure on unit labour costs - the possible sign of need of tighter monetary policy. On the inflation front the data from February did not differ much from the numbers we got for the first month of the year - price pressure is visible, however, has yet to accelerate markedly as of yet. Finally, retail sales for March grew 0.4% MoM compared to the consensus of a 0.4% MoM decline.

PMIs don’t stop disappointing

PMI data published this morning turned out to be really worrisome. Looking ahead, one may suspect a noticeable economic slowdown during the first three months of the year in the Eurozone economy (look at the chart below). On the other hand, car sales data from Germany suggests that some improvement may have taken place in February. By and large, the correlation between PMI and industrial production has fallen in many countries lately casting a shadow on the Markit’s survey. Note that the German manufacturing PMI slumped in March to the lowest since mid-2012 - the euro crisis.

GDP growth in the Eurozone economy is set to slow markedly this quarter if PMI is right. Source: Macrobond, XTB research