In March, the flow of economic data is improving in Europe as well, at a lag compared to the US. Economic growth in the euro area now seems more likely to accelerate marginally compared to the closing quarter of 2015…..
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Intesa Sanpaolo – Research Department For professional investors and advisers only
The Fed is seeking to prepare the markets to the possibility of interest rates rising already in April or June, but is not proving very successful for now. “Doves” such as Evans are also talking of new interventions on policy rates.
At a lag of almost one month compared to the United States, the flow of economic data is yielding positive surprises more frequently in the Europe as well. After January industrial output, monthly surveys also outlined improvements this week, mostly beating expectations. The euro area composite PMI reabsorbed its February decline and returned to the same levels as in January (53.7). The IFO index increased by one point to 106.7, supported by both expectations and by a more positive assessment of the current situation. The BNB index also improved more than expected, from -6.6 to -4.2. So far, the only outlier has been the French INSEE survey, which yielded a decline in confidence in all sectors. The overall brightening of confidence indices may in part reflect an easing of the financial turbulences seen at the beginning of the year, which had probably conditioned sentiment negatively in February. One aspect should be stressed: with the exception of the BNB leading indicator, the recovery outlined by monthly surveys is mostly concentrated in the services sector. Manufacturing PMIs have effectively improved little (by only 0.2 points to 51.4), and are feeling the effects of a new worsening of the foreign orders diffusion index, from 51.5 to 51.0. The IFO survey revealed a strengthening of sentiment among German manufacturing companies, but with a decline in current output and an increase in inventories. The relative weakness of the manufacturing sector reflects the ongoing fragility of foreign demand, due to a lack of clear signals of a recovery in China, and to the fact that oil producer countries have still not fully adjusted to the lower level of oil prices. However, data indicate that GDP growth, far from slowing in the opening quarter of 2016, could accelerate marginally from 0.3% in 4Q 2015.
In the United States, where economic data have been improving for longer, full employment is at hand, the inflation trend is accelerating, and the tones used by central bankers in their statements are starting to shift significantly. Over the past few days, several members of the FOMC stood by the choice to leave rates unchanged in March, given the uncertainty generated by international factors, while also signalling they are in favour of new hikes in the course of 2016. Such statements come as no surprise when they are made by “hawks”, but this time around they were offered by a “dove” such as Evans, according to whom two interventions in the course of the year are by no means unreasonable. Several Fed participants (Williams, Lockhart, Harker, Bullard) warned that the next move could even be made at the next meeting on 26-27 April. The markets, on their part, are currently attaching a very low probability to this scenario (15%), and only see the probability of a new hike exceeding the 50% mark starting in July. Despite recent adjustments, the June fed funds futures contract still implies an interest rate lower by 4bps compared to 15 March. However, the trend of the markets is at present being affected also by the reaction to the Brussels terrorist attacks, which exerts opposite pressures on rates. The statements made by Fed members reaped their strongest impact on the currency markets: the dollar has appreciated by 1.4% since 18 March, reabsorbing most of the decline which followed the Fed meeting of 15-16 March. The divergence between the Fed and the markets will be cleared by data flow in the next few weeks, which we believe will confirm the persistence of the expansion phase.
Source: BONDWorld.ch
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