Fed’s Beige Book should show improved economy prior to Harvey
ECB at Thursday’s meeting will discuss QE tapering but may not make an announcement
U.S. ISM non-manufacturing index expected to rebound higher
U.S. trade deficit expected to widen modestly
Fed’s Beige Book should show improved economy prior to Harvey — The Fed today will release its Beige Book report ahead of the Sep 19-20 FOMC meeting in two weeks. The Fed in its last Beige Book report released on July 12 said, “Economic activity expanded across all twelve Federal Reserve Districts in June, with the pace of growth ranging from slight to moderate. In addition, the majority of Districts expected modest to moderate gains in the months ahead.”
Today’s Beige Book report should find improved economic conditions across the country considering that Q2 GDP was strong at +3.0%. Hurricane Harvey occurred late in the survey period, which means that today’s report is not likely to pick up the effects from the devastation seen in Texas.
The market consensus is that the FOMC at its upcoming Sep 19-20 meeting will announce the start date for its balance sheet reduction program. The start date is likely to be October 1 in order to be synchronous with calendar quarters. However, the Fed may delay the start of the program, or make the program conditional on whether Congress raises the debt ceiling, since the Fed can’t start reducing its balance sheet until the debt ceiling is raised.
The FOMC has already announced that its balance sheet drawdown program will begin with a cap of $10 billion per month and that the cap will then rise by $10 billion every three months until the maximum cap of $50 per month is reached. The program is currently open-ended with no termination date or final balance sheet target level. The Fed still needs to decide how it will handle its monetary policy going forward before it can determine an optimal level for its balance sheet.
The market is assigning negligible odds near 12% for a rate hike at the upcoming Sep 19-20 meeting. The market is also assigning negligible odds near 16% for a rate hike at the following meeting on Oct 31/Nov 1. The odds for a rate hike at the following meeting in December are below 50%. In general, the market at present does not believe the Fed will be able to implement its third and last rate hike of the year in December due to tepid inflation figures.
ECB at Thursday’s meeting will discuss QE tapering but may not make an announcement — The ECB so far this year has studiously avoided even discussing whether it will taper QE in 2018 in an effort not the spook the markets into pushing Eurozone bond yields and the euro sharply higher. However, the QE program is due to expire at the end of December, which means time is growing short for the ECB to decide what to do about its QE program in 2018. Bloomberg reported last week that the ECB is in no rush to announce a QE tapering decision and that the decision may not come until its next meeting on Oct 26 or even the following meeting on December 14. The report said that the ECB may only announce some broad guidelines at this week’s meeting or the following meeting on Oct 26 and leave the details for the December meeting.
By deferring the QE tapering details, the ECB can attempt to keep Eurozone bond yields low and put a cap on the euro. ECB officials in recent weeks have expressed some concern about the strength of the euro, which is hurting Eurozone exporters and is counteracting the ECB’s attempt to stimulate the economy back to health.
The market consensus is that the ECB is likely to taper its QE program down to zero in the first six or possibly nine months of 2018. The ECB would then presumably keep its balance sheet constant for a period of time as the Fed has done, leaving the decision until later about when to start letting its balance sheet decline.
U.S. ISM non-manufacturing index expected to rebound higher — The market consensus is for today’s Aug ISM non-manufacturing index to show a +1.6 point increase to 55.5, recovering almost half of July’s -3.5 point decline to 53.9. The index ran up to a 1-3/4 year high of 57.6 in February on optimism following the November 2016 election. However, the index has since settled back on the slow Republican agenda. Yet, business confidence remains relatively strong due to the resilient U.S. economy, the weak dollar, and the strong U.S. stock market. In addition, there is still hope that Republicans will eventually come through with a tax cut. Last Friday’s ISM manufacturing index showed a stronger-than-expected gain of +2.5 points to 58.8, which bodes well for today’s non-manufacturing index.
U.S. trade deficit expected to widen modestly — The market consensus is for today’s July U.S. trade deficit to widen modestly to -$44.7 billion from June’s -$43.6 billion. The expected deficit of -$44.3 billion would exactly equal the 12-month trend average of -$44.3 billion.
The good news for the U.S. trade deficit is that exports rose in May and June by a total of +1.6% to post a new 2-1/2 year high of $194.4 billion. U.S. exports saw support from stronger global economic growth and from the weaker dollar seen this year. Meanwhile, U.S. imports have stalled in the past two reporting months and fell to +4.6% on a year-on-year basis. Exports on a year-on-year basis rose by a stronger +5.8% y/y in June.
The wide U.S. trade deficit continues to be a bearish underlying factor for the dollar since about $1.2 billion worth of dollars flow overseas every calendar day. However, those excess dollars are a drop in the bucket for the FX markets, which trade an average of $5 trillion worth of currencies every day with 88% of that trade involving U.S. dollars, according to the BIS.