Daily Agenda: Fed Watchers Continue to Hurry Up and Wait

Euro zone CPI improves; Spanish GDP jumps; Bank of Japan stays the course; BNP Paribas beats analyst projections.


Andrew Harrer

The Federal Open Market Committee’s policy statement yesterday, coming on the heels of surprisingly weak first-quarter GDP data, has left investors with a murky vision of the Federal Reserve’s tightening path. Fed Chair Janet Yellen and her colleagues indicated that slower activity and labor market gains are reason for pause, while overall, the fundamentals remain sound for growth to get back on track. Widely interpreted by analysts as a move to push the first tightening action back to September, the updated language makes the monthly Department of Labor monthly report next week all the more critical for market sentiment as investors consider how long U.S. central bank leaders would be willing to wait.

U.S. jobless report sign of hope. U.S. initial jobless claims registered at 262,000, a huge plunge that marks a 15-year low and casts a sanguine glow on the report next week. Separately, March personal consumption expenditure data showed personal income and spending register below consensus forecasts.

Euro zone CPI comes in flat. After four consecutive deflationary readings, headline consumer price inflation index levels for the common currency zone, released today by Eurostat, remained unchanged between March and April. Core levels excluding food and fuel inputs rose marginally on a year-over-year basis. This data represents a modest victory for the European Central Bank as it continues to pursue higher inflation targets through an aggressive asset purchase program. Separately, the headline unemployment rate for the region rose marginally in March.

Spanish GDP rises sharply. Headline GDP in Spain climbed by 0.9 percent for the first three months of the year, a pace exceeding 2.5 percent year-over-year. Multiple analysts predict that the nation can achieve a growth rate of over 3 percent for 2015 in total. Critics of the Greek government note that Spain has reached the fastest growth rate since 2007 despite implementing difficult austerity measures following the credit crisis largely due to deep structural reforms — the type that Athens is currently rejecting.

Chinese steel demand slumps. According to data from the China Iron and Steel Association released yesterday, total domestic demand for steel declined by 6 percent in the first quarter of 2015, prompting a reduction in output of nearly 2 percent. While this represents the first reported contraction in over a decade, analysts note that slowing fixed-investment levels have made a slowdown all but inevitable.

BNP report beats forecasts. BNP Paribas, the largest French bank by assets, today announced first-quarter net income that, at €165 billion ($184.5 billion) versus €1.4 billion during the same period in 2014, beat consensus analyst estimates by a wide margin. Investment banking activity, particularly profits from the fixed-income trading division, were the primary driver of the gains, offsetting disappointing returns in consumer units.


Bank of Japan holds course. The Bank of Japan today announced no change in monetary policy measures, despite increase calls from a minority of political leaders to expand the bank’s asset purchase program. Separately, in its semiannual economic outlook report, the Japanese central bank predicted that, although the 2 percent inflation target can be achieved by fiscal-year 2016, overall consumer price index consumer price index levels for year-end 2015 would reach an annualized pace of 0.8 percent, down from earlier projections of 1 percent.

China opens the door to more foreign investment. On Wednesday the State Administration of Foreign Exchange announced that 11 foreign investment funds would be granted increased investment quotas totaling roughly 30 billion yuan ($4.84 billion). Among those investors granted extended buying privileges are Singapore’s sovereign wealth fund and Vanguard Group’s Australian fund management arm.

Russia cuts rates more than forecast. The Central Bank of Russia today announced a 1.5 percent reduction in the benchmark one-week auction rate, a more aggressive move than anticipated as Elvira Nabiullina, the bank’s governor, grapples with a deteriorating economic situation. The rebound of the ruble, which has gained nearly 20 percent against the dollar year-to-date after losing roughly half its value in 2014, allows the central bank the latitude to ease in response to weak activity and inflation measures spurred by Western sanctions.

Portfolio Perspective: Thailand-X-PressTuuli McCully and Neil Shankar, Scotiabank

Thailand’s slow economic recovery was the key driver behind the Band of Thailand’s decision to provide further monetary stimulus to the economy. The assessment was not unanimous, with two out of seven policymakers voting in favor of keeping the benchmark rate unchanged. The dissenting committee members argued that policy space for further easing was limited and that Thailand’s monetary policy stance was already accommodative enough. Furthermore, they viewed that recent fiscal stimulus should underpin the economy’s revival.

Thai monetary authorities assess, however, that the recuperating tourism sector and increasing public investment that reflects the military government’s fiscal measures are not enough to offset subdued export sector performance and weak private consumption. The tourism industry has bounced back from poor performance last year stemming from recent political turmoil. Indeed, tourist arrivals grew by 18.9 percent year-over-year in the first two months of 2015. Meanwhile, the country’s exporters are faced with weaker import demand from China, which is Thailand’s largest export destination, purchasing 12 percent of all shipments abroad. Consumer and business confidence continues to be adversely impacted by uncertainty regarding the timing of the next election, thereby dampening private consumption and investment.

Tuuli McCully and Neil Shankar are international economists at Scotiabank in Toronto.