Wednesday May 25, 2016

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Fedspeak; House Prices; Canada Rate Decision Follow TOPLive for a blog on the

BEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS release of the EIA's Weekly Petroleum Status Report at 10:30 a.m. on the WHAT TO WATCH: Philadelphia Fed President Patrick Harker will speak at 9 a.m. at Bloomberg terminal here. a forum on America's economy in 2016 at the National Constitution Center in Philadelphia. Minneapolis Fed President Neel Kashkari then participates in a conversation about the relationship between the energy sector and monetary policy at a COMMENTARY IN THIS ISSUE conference in Bismarck, North Dakota at 11:40 a.m. Dallas Fed President Robert Kaplan will speak at the Greater Houston Partnership Thought Leader Series at 1 p.m. The Bank of Canada will likely offer ECONOMICS: The Census Bureau releases the advance goods trade balance for dovish guidance and acknowledge poor April at 8:30 a.m. The consensus estimate calls for a $60 billion deficit, widened from first-half data in today's interest-rate $56.9 billion the month before. At 9 a.m., the FHFA House Price Index is forecast to decision: Vincent Cignarella. rise 0.5 percent in March after a 0.4 advance in February. The Bank of Canada decides on interest rates, with the economist consensus predicting the benchmark overnight rate Why are markets and the media so will remain at 0.5 percent, 10 a.m. obsessed with the timing of the Federal Reserve's next interest-rate increase? GOVERNMENT: Russian President Vladimir Putin’s economic council in Moscow Narayan Kocherlokota. may discuss plans to achieve average growth of 4 percent. The U.S. Energy Information

Administration releases its weekly crude oil inventory report. David Stockton of the Peterson Institute MARKETS: Global equities rose to a two-week high after U.S. housing data spurred for International Economics discusses optimism the world’s largest economy can withstand higher interest rates. the probability of a Fed interest-rate hike (All times local for New York.) this summer: Michael McKee and Tom Keene.

Richmond Fed Miss Continues Regional Factory Slump 1.1% The rise in U.S. household debt in the first quarter, according to data from the New York Fed. Total mortgage debt rose 1.5 percent from the final quarter of 2015 to $8.37 trillion, marking the highest level since the third quarter of 2011, according to the New York Fed’s quarterly report on household debt and credit.

WHAT TO READ

Payroll employment remained about 1 million jobs below trend as of April based on recent population and labor force projections, implying labor market slack is likely to persist until late 2016, Chicago Fed economists write in a note. Factories aren't having such a great month. Yesterday's decline in the Richmond Fed index to minus 1 means regional indexes tracking manufacturing are zero-for-three in May. Earlier this month, the New York Fed's Empire Manufacturing Survey and the Philadelphia Fed's Business Outlook Survey missed expectations, with both releases indicating contraction. Further signals on the state of factory output will come from the Kansas City Fed on Friday, The number of boards of directors at the followed by a national look via the ISM manufacturing index next Wednesday and prints on Fed’s 12 regional banks favoring an Chicago PMI and Dallas Fed manufacturing on June 3. increase in the central bank’s discount — Ben Baris, Bloomberg Brief Editor rate rose to four in April from two, minutes from March-April meetings show. read Click here to view a live version of this chart on the Bloomberg terminal. more on the Bloomberg terminal here.

CANADA VINCENT CIGNARELLA, BLOOMBERG FIRST WORD May 25, 2016 Bloomberg Brief Economics 2

CANADA VINCENT CIGNARELLA, BLOOMBERG FIRST WORD

Central Bank May Walk Back First-Half, 2016 Growth Forecasts The Bank of Canada will likely offer Dollar-Loonie Spot Rate (Red Line Is Trend-Line Resistance) dovish guidance and acknowledge poor first-half data in its interest-rate decision today. Bank officials may also have to dial down their 2016 gross domestic product forecast for 1.7 percent in the April Monetary Policy Report. Virtually no one expects a change in rates from central bank. The pricing for either a cut or hike combined is less than 14 percent out to December, and all 23 estimates compiled by Bloomberg predict the rate will be held at 0.50 percent today. A potential summer Federal Reserve rate hike is shifting market bias toward a higher U.S. dollar. The USD/CAD rate will likely face formidable trend-line resistance around 1.325. Market participants should not lose sight of the fact the loonie has weakened more than 7 percent against the U.S. dollar in just three weeks. A consolidation and profit-taking phase is likely before the continuation of the Click here to view a live version of this chart on the Bloomberg terminal. current trend. Buy USD/CAD, with a target of 1.35, Sebastien Galy, director of U.S.-Canadian Two-Year Sovereign Spreads foreign-exchange strategy for Deutsche Bank, writes in a note. Canada is particularly vulnerable to monetary policy divergences with the Fed because its current-account deficit is predominantly financed by debt related flows, Galy writes. In contrast, markets are pricing the probability of a BOC rate hike over the next three years at less than 50 percent. April’s Monetary Policy Report said the fiscal stimulus from Prime Minister Justin Trudeau’s budget will more than offset the negatives from slower projected global growth, a reduction in planned energy capital expenditure investment and a stronger Canadian dollar. The impact of fiscal stimulus won't be Click here to view a live version of this chart on the Bloomberg terminal. seen until June for capital investment and July for tax credits, Nomura senior the U.S. and elsewhere. to be a prominent factor in the policy economist Charles St. Arnaud writes in Most relevant Canadian data since the statement, while Finance Minister Bill an email. April 13 policy statement have missed Morneau said they will have a modest While the loonie has weakened more estimates, as have data in the U.S. That’ impact on quarterly growth. Canada’s oil- than 5 percent from year-to-date highs s a one-two punch to prior 2016 growth sands producers are set to re-enter versus the U.S. dollar, it remains more forecasts the BOC can’t ignore. U.S. evacuated sites after Alberta lifted orders than 10 percent above January levels. A retail sales, capex spending and non- Monday. higher CAD contributes to a lower profile farm payrolls data have all been below Vincent Cignarella is an FX strategist who writes for non-resource exports in central bank Bloomberg survey forecasts. for Bloomberg. The observations he makes are his projections, as does lower demand from The Alberta oil-sands fires are unlikely own and are not intended as investment advice. May 25, 2016 Bloomberg Brief Economics 3

COMMENTARY NARAYANA KOCHERLAKOTA, BLOOMBERG VIEW COLUMNIST May 25, 2016 Bloomberg Brief Economics 4

COMMENTARY NARAYANA KOCHERLAKOTA, BLOOMBERG VIEW COLUMNIST

An Unhealthy Obsession With the Fed Why are markets and the media so monetary policy, but most economic opposed to every other meeting, could obsessed with the timing of the Federal models would suggest that there would be too much of a shock for the economy. Reserve's next interest-rate increase? be almost no difference in the effect on How policy makers weigh these The sheer intensity of their attention, I employment or inflation. considerations against the inflation think, reveals a deeper problem: They The obsession with when the Fed will objective will influence their decision- don't understand what the Fed is act, then, most likely has another making not only in June, but also at ultimately trying to achieve. motivation: Outsiders are seeking clues future meetings and whenever an In Fed-watching lately, the calendar is to the central bank's broader goals for economic challenge arises. A Fed official king. Investors are focused on what will monetary policy. concerned about financial market happen at the central bank's next policy- The Fed's stated aim is to keep inflation distortions, for example, might not making meeting in June — and minutes at 2 percent over the longer term, but its support aggressively lowering interest from the April meeting, released last actions send a different signal. It has, for rates in response to a future recession. week, have led many to expect a quarter- example, removed stimulus over the past It's hard to know which objectives will percentage-point rate increase. Fed three years even as inflation and inflation dominate policy in the longer run. Hence, officials, when they speak at public expectations have slipped downward. Fed markets are parsing the June decision for events, inevitably face questions about officials' economic projections, too, whatever information they can get. the likely number of interest-rate hikes in suggest that they don’t see getting This kind of uncertainty — about which 2016 and 2017. inflation back up to target quickly as a goals will define the Fed's policies — is Timing alone, though, hardly merits so primary determinant of monetary policy. not healthy. Consumers and businesses much attention. To understand why, Apparently, the Fed is balancing the can’t make good decisions if they don’t consider two possible scenarios. In one, pursuit of its inflation target with other have a strong enough sense of how the the Fed starts raising rates in June and objectives. In speeches, officials have central bank will act in any situation. Fed then adds another quarter percentage offered various ideas of what those officials must have — or be given — a point at every second policy-making objectives might be. Some worry that low much clearer set of shared objectives for meeting (once every three months) for interest rates are causing risks and managing the economy. the next three years. In the other, the distortions to build in the financial system. Fed waits until the second half of 2017 Some say they don’t want the This column does not necessarily reflect the and then adds a quarter percentage point unemployment rate to fall to an opinion of the editorial board or Bloomberg LP at each of the next twelve meetings. The unsustainably low level. Some think that and its owners. second path represents slightly easier raising rates at every meeting, as

DATA & EVENTS May 25, 2016 Bloomberg Brief Economics 5

DATA & EVENTS

OVERNIGHT Re-Widening of Trade Gap in 2Q to Weigh on Growth

Europe Greece’s creditors reached a preliminary accord to ease the country's debt burden but left the important details to be hammered out after Germany’s federal election next year. At a meeting of euro-area finance ministers in Brussels that ended early today, and paved the way for a 10.3 billion-euros ($11.5 billion) aid payout, the International Monetary Fund retreated from its hard-line stance for concrete and generous measures on Greece’s debt, allowing creditors to announce a “breakthrough” despite giving no figures or real commitments. The advance report on the goods trade balance will get added market-participant attention German business sentiment after the significant narrowing of the official trade gap at the end of the first quarter The improved to the strongest level in five deficit shrunk by about $7 billion in March, and February was revised lower as well. While a months in May, a sign that growth shrinking trade gap is directly positive for GDP growth, there may be negative underlying momentum in Europe’s largest economy consequences if the sharp drop in imports is a reflection of weak domestic demand. The remains strong. The Munich-based Ifo official trade data are reported June 3. The Bloomberg consensus anticipates a partial institute’s business climate index rose to rebound in the April report to minus $60.0 billion versus minus $56.9 billion prior. If the 107.7 from a revised 106.7 in April. That consensus is right and the trade gap re-widens in the current quarter, an increasing net beat the median estimate in a Bloomberg export drag will provide an additional reason to anticipate a muted rebound of growth. survey of economists, which was for an — Carl Riccadonna, Bloomberg Intelligence Economist increase to 106.8.

Click here to view a live version of this chart on the Bloomberg terminal. European Central Bank policy makers called for governments to coordinate CALENDAR their economic strategies to sustain the region’s recovery. “Monetary policy cannot be a substitute for economic TIME COUNTRY EVENT SURVEY PRIOR policy coordination or the lack of 7:00 U.S. MBA Mortgage Applications — -1.60% reforms,” Francois Villeroy de Galhau, 7:00 Brazil FGV Construction Costs MoM 0.36% 0.41% the French central-bank chief, said at a Institute of International Finance meeting 8:30 U.S. Advance Goods Trade Balance -$60.0b -$56.9b in Madrid today. His Spanish counterpart, 9:00 U.S. House Price Purchase Index QoQ — 1.40% Luis Maria Linde, said the region’s 9:00 U.S. FHFA House Price Index MoM 0.50% 0.40% policies should be “better exploited” to spur the recovery. Both men are 9:00 Mexico Trade Balance -579.0m 155.0m members of the ECB’s Governing 9:45 U.S. Markit US Services PMI 53 52.8 Council. 9:45 U.S. Markit US Composite PMI — 52.4 10:00 Canada Bank of Canada Rate Decision 0.50% 0.50% Asia 10:00 Mexico Current Account Balance -$8300m -$7698m Chinese officials plan to ask their 13:30 Mexico Mexican Central Bank Releases Inflation Report — — American counterparts in annual talks next month about the chance of a 21:00 China Swift Global Payments CNY — 1.88% Federal Reserve interest-rate increase Source: Bloomberg. Surveys updated at 5:40 a.m. New York time. Click on the highlighted releases to see the full range of economists' forecasts on the terminal. in June, according to people familiar with the matter. The Chinese delegation will

try to deduce whether a June or a July rate rise is more likely, as their nation’s policy makers prepare for the potential impact on financial markets and the yuan, the people said. MARKET INDICATORS May 25, 2016 Bloomberg Brief Economics 6

MARKET INDICATORS

Source: Bloomberg. Updated 5:45 a.m. New York time.

SURVEILLANCE WITH KEENE & MCKEE May 25, 2016 Bloomberg Brief Economics 7

SURVEILLANCE WITH KEENE & MCKEE

Britain does not exit, they have a stronger A: I was, quite frankly, surprised at the

Peterson Institute for International Economics case to do so than probably a less risky hawkish tenor of the minutes. I think Chair senior fellow David Stockton speaks with situation by the time of their July meeting. Yellen is probably to the dovish side of the Bloomberg's Michael McKee and Tom Keene middle of that committee, and some of about the probability of a Federal Reserve Q: What does actual progress mean? that press conference sort of reflected interest-rate hike this summer. A: I would term it, at least from the Fed's that. Now they've also, subsequent to the perspective at this point, on two meeting, gotten some stronger economic dimensions. They want to continue to data, at least on the spending side of Q: Can you make an economic case see the labor market improve and take things, so I think that's probably given for the Fed to raise rates now? up some of the slack and they really want them more impetus to the centrists who A: I think the economic case can be made to be reasonably confident that inflation are ready to move, and I think that's what for a rate hike, at least by end of the is firming up and they've seen some we've been hearing more recently. summer on the basis of an economy that actual progress I think on both those continues to grow and grow above trend. dimensions. So that's going to make Q: A big concern for the Fed in I know a lot of people were concerned them more interested in going ahead and January was what was happening about the weak first quarter but I think starting this tightening process. overseas and volatility in the financial things are bouncing back here in the I think at this point they will want to markets. We don't seem to be getting second quarter. Employment situation still keep the option open of moving in July, the same sort of reaction in the looks strong. Despite that figure that most and they've got the capability of making markets now that we had in January to people thought was kind of low at 160,000 sure that the press, the public, market the idea of further Fed activity, do we? last month, that's actually twice what we participants are ready for that. They've A: Back in January, it was a combination need to absorb the increase in the labor already sort of pressed the battlefield, so of factors. One was Fed tightening itself, force, so we're still growing above trend, to speak, in terms of making a move. and the prospect of more, that is the Fed an unemployment rate that is likely to drift My view is that the Fed could make a was telling the markets at that time that it lower, and we've seen some firming of more convincing case that every meeting had to expect four rate increases over inflation in recent months. So I think the is live by having a press conference after the course of 2016. The Fed's looking case for some small further increase in every meeting. I know early on there was considerably less aggressive now, but rates is a reasonable one at this point. some resistance to that at the Fed also I think there were amplified because it looked like it would be so concerns, both about the global economy Q: Is your base case at this point that much work to put so much pressure on and the domestic economy and just how the Fed would go ahead? the chair, but both Bernanke and Yellen weak things are. I think those concerns A: I think it's a little less than 50/50 that have used those press conferences quite have abated somewhat. I don't think they'll move in June, in part because with effectively to communicate Fed policy. we're out of the woods on the global the British vote taking place just a few economy and I think the U.S. economy is days after the FOMC meeting, they might Q: How do you square her press looking reasonably strong. So I think be reluctant to tighten into a period of conference after the April meeting with markets are going to be able to digest financial volatility, so I think they're likely the Fed minutes? She was very dovish some further rate hikes here. to wait until July, and assuming that in that meeting. This interview has been edited and condensed.

Bloomberg Brief: Economics

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