March U.S. consumer sentiment expected to show a mild gain and snap the Jan-Feb losing streak
BOE leaves rates unchanged as it eyes June 23 Brexit vote
Markets are back to expecting one rate hike by year-end
Chinese stock market rallies to 3-week high as yuan strengthens
March U.S. consumer sentiment expected to show a mild gain and snap the Jan-Feb losing streak — The market is expecting today’s preliminary-March U.S. consumer sentiment index from the University of Michigan to show a small +0.5 point improvement to 92.2, overcoming Feb’s -0.3 decline to 91.7. The U.S. consumer sentiment index showed strength during Oct-Dec with an overall +5.4 points gain to a 7-month high of 92.6. However, the index then fell mildly by a combined -0.9 points in Jan-Feb due to the overseas turmoil and the downside stock market correction.
The question going forward is the extent to which U.S. consumer sentiment can improve now that the U.S. stock market has shown some recovery and the turmoil in China has at least temporarily subsided. U.S. retail sales were weak during the winter with a -0.4% decline in January and a -0.1% decline in February. The U.S. economy desperately needs U.S. consumers to come out of their shells in March and during spring in order to keep supporting the U.S. economy. The U.S. economy in Q4 showed weak growth of +1.0% and was held up only by a +1.38 point contribution from consumer spending. Otherwise, investment and government were roughly flat and net exports and inventories subtracted from GDP growth.
Supportive factors for U.S. consumer sentiment spending currently include the recovery in the U.S. stock market, continued strength in the labor market with a positive payroll report of +242,000 in February, and the continued rise in U.S. home prices. Negative factors for consumer sentiment include the recent modest rise in gasoline prices, a slower increase in wages and income, the Fed’s current intention to continue raising interest rates, and concern about overseas risks.
BOE leaves rates unchanged as it eyes June 23 Brexit vote — The Bank of England at its policy meeting on Thursday left its base rate unchanged at 0.50% where it has been for the last seven years. The BOE is currently on the defensive due to weak inflation, austere fiscal policy, slow world growth, and concern about whether UK citizens might vote to leave the EU in the upcoming Brexit vote on June 23. The BOE expects the approaching Brexit vote to hold back investment and put a dent in aggregate demand.
Despite those negative factors, the BOE is under no immediate pressure to cut rates since domestic consumption remains relatively strong. The market consensus is for U.K. GDP to remain relatively steady this year at +2.0% after 2015’s growth rate of +2.2% and then improve to +2.2% in 2017-18. The consensus is for the UK CPI this year to rise to only +0.7% from unchanged in 2015.
Sterling has fallen sharply in recent months to post a 6-year low of $1.3836 at the end of February but has rebounded higher by +4.8% in the past several weeks to post a 1-month high yesterday. Sterling remains vulnerable in the lead-up to the June 23 Brexit vote. Prime Minster Cameron is urging citizens to vote to stay in the EU but there are equally-vocal forces that are arguing for the U.K. to leave the EU such as London Mayor Boris Johnson. If UK citizens were to vote to leave the EU, the UK would likely see an extended period of uncertainty and volatility that would likely lead to reduced business investment in the UK and some capital flight, leading to further weakness in sterling.
The recent UK polls suggest a close outcome with 51% believing the UK should stay in the EU versus 49% believing the UK should leave, according to an average of polls compiled by WhatUKthinks.org. However, the betting odds strongly favor the UK staying in the EU with Paddypower.com reporting a 73% chance of staying in the EU (4/11 odds) versus only a 33% chance (2/1 odds) of leaving the EU.
Markets are back to expecting one rate hike by year-end — Prior to this week’s FOMC meeting, the markets had accelerated full expectations for the Fed’s next rate hike to August. However, the dovish outcome of the FOMC meeting caused the market to push back full expectations of the Fed’s next rate hike to December. The dovish outcome of the FOMC meeting was caused by the FOMC’s recognition of overseas risks in its post-meeting statement and the revised Fed dots that forecast only two rate hikes this year rather than the four rate hikes that the FOMC expected as of December 2015.
Fed Chair Yellen in her post-meeting press conference said the next FOMC meeting in April remains “live” for the possibility of a rate hike. However, the markets are discounting only a 4% chance for a rate hike at that April meeting. But the chances for a rate hike then ramp up to 52% for the June meeting, 70% for the Sep meeting, 90% for the Nov meeting and 100% for the December meeting.
Chinese stock market rallies to 3-week high as yuan strengthens — The Chinese markets this week have been relatively strong so far this week with the Shanghai Composite index up +3.3% this week, posting a 3-week high on Thursday. The Chinese stock market received a boost from a stronger yuan as USDCNY fell to a 3-1/2 month low on Thursday and closed the day down -0.69%. The 2-week-long Chinese People’s National Congress meeting ended on Wednesday. Top party officials have now returned to their posts to try to better manage China’s transition to a modern consumer economy and achieve the government’s GDP target of 6.5-7.0% by any means necessary, even if that means causing even larger problems down the road.
