FOMC minutes, US payrolls, Canada and Iran
For Eric Lascelles, chief Economist at RBC Global Asset Management, the Fed will rise its rates as of September. He also highlights weak business investment and employment intentions in Canada and the impact of a potential nuclear agreement with Iran.
The upcoming Fed minutes should prove quite interesting in the extent to which they add colour to the thinking behind the last Fed decision. The dovishness of that decision caught the market by surprise.
Yes, the statement removed its tribute to “patience” before tightening monetary policy – a theoretically hawkish signal, but this was undermined by downward growth and inflation forecast revisions, and by a material decline in the expected level of the Fed funds rate by the end of 2015.
As such, the minutes will be an opportunity to clarify what has changed in the Fed’s internal thinking. Presumably, dollar strength and low inflation will be cited as central reasons for the Fed’s new caution.
Given that these minutes follow a Fed decision that was accompanied by a press conference and updated forecast, the scope for significant surprises is limited.
That said, in this new era of diminished transparency, the Fed is becoming harder to predict. Our bottom line is that the Fed is now most likely to begin raising rates in September – a little sooner and more than the market currently budgets.
US job creation stumbled in March with a mere 126 thousand new jobs, ending a remarkable 12-month run of 200K+ new jobs per month. A 69K downward revision to prior months further soured the interpretation.
This result certainly advances the argument that the US economy has lost a step. Consistent with this, we shifted our US outlook at the beginning of the year from an above-consensus stance to an on-consensus one.
Other markets arguably have the better ability to surprise to the upside, with the eurozone the most prominent example. However, the degree of recent pessimism is not entirely warranted.
Some of the latest month’s weakness (around 30K jobs) was related to bad weather. More generally, US first quarter economic numbers have disappointed for the same reason, with Q1 GDP likely to fall well short of the recent trend (and potentially at +1.0% annualized or below).
It is also important to keep in mind that the US economy barely needs 100K jobs each month to keep pace with demographics, so even this month’s disappointing outturn represents a small step towards full employment.
Finally, hourly wages grew by a robust 0.3% in the report, arguing that inflation pressures may be brewing.