Market movers today
We are facing an interesting data calendar with several important releases amid markets digesting Federal Reserve Chair Janet Yellen’s comments yesterday on the US monetary policy outlook.
In the US, retail sales figures for January are released. Private consumption continues to be the main growth driver and given the very high level of consumer confidence we expect retail sales rose 0.3% m/m in January, which would indicate that private consumption got off to a great start in 2017. Also today, we get CPI figures for January which we expect rose 0.3% m/m pushed up not only by core CPI but also by higher energy and food prices, implying an increase in the inflation rate to 2.4% y/y in January from 2.1% y/y in December. CPI core inflation is expected to fall to 2.1% y/y from 2.2% y/y, which means the Fed can afford to stay patient before hiking again. Also, Federal Reserve Chair Janet Yellen will testify before the House of Financial Services Committee (after she testified before the Senate Banking Committee yesterday, see ‘Selected Market news’ below).
In the UK the labour market report for December is due. We expect the unemployment rate (3M avg.) rose to 4.9% from 4.8%, as the very low print in September drops out of the threemonth average. We estimate the annual growth in average weekly earnings ex bonuses (3M average) fell to 2.6% y/y in December from 2.7% y/y in November.
In the Scandies, the big event of the day is the Riksbank monetary policy meeting in Sweden. For more info see ‘Scandi Markets’ on page 2.
Selected market news
In yesterday’s semi-annual monetary policy testimony to US Congress, Fed chair Janet Yellen repeated the message from the January FOMC meeting that the Fed expects to raise rates over the coming year if economic developments remain on track. Yellen said it would be ‘unwise’ to tighten policy too late as it could require an undesirable tightening pace at a later stage at a larger cost; a message delivered at several previous occasions.
Importantly, Yellen repeated that the Fed wants more clarity about the fiscal policy outlook and that the Fed still has not yet taken into account possible policy changes as this would be ‘speculation’. Yellen did, however, say that fiscal easing is ill timed given unsustainable public finances and an output gap which is almost closed. As a result, Yellen’s comments seem to confirm markets in the view that fiscal easing will lead to tighter monetary policy than in the baseline case outlined by Yellen. While this has been the message since the December hike, this, alongside comments on the discussion on balance sheet reduction, weighed on US FI while the USD rallied on higher short-end US rates.
hike in June.When should we expect the next Fed hike? Yellen specifically stated: "At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate". As her comments did not refer to a rate hike ‘soon’ (but upcoming meetings) and referred to an adjustment (singular) we still think a March hike is unlikely. In our view, a May hike is still in play but our base case remains a hike in June.
In Norway, the quarterly consumer confidence release from Finance Norway revealed another solid rise. Together with improved purchasing power from lower inflation, we expect higher optimism among consumers to feed into higher private consumption this year.
