Wednesday’s much-anticipated FOMC meeting left markets somewhat disappointed, providing less easing than expected. The Fed chose to extend the current maturity extension programme, the so called ‘Operation Twist’, to year-end. However, it did not extend the programme to include mortgage-backed securities in the purchases. It also agreed to continue to sterilise the purchases by selling shorter-dated securities. Likewise, it did not change the forward guidance on rates in the statement, sticking to keeping rates low ‘at least through 2014’ – but not longer, as many observers had expected. Despite the Fed doing somewhat less than expected, market sentiment was supported by the softening of the tone in the statement, signalling a more gloomy economic outlook than at the April meeting. The statement also stated that the Fed would be ready to take further action to support the recovery if it continues to falter. This leaves Danske to believe that the bar for further easing is low. If we continue to receive weak data – particularly out of the labour market – another round of easing could come as soon as the meeting ending on 1 August.
The dim view of the labour market was supported by an initial jobless claims reading of 387,000 – 25,000 higher than the March low. Initial claims has been trending higher recently with the four-week moving average up from 379K to 386K over the past two weeks, suggesting that the deterioration in the labour market is not all caused by seasonal and weather effects.
Weakness was also present in the manufacturing PMI data published through the week, as US Markit flash PMI, Empire and Philadelphia Fed PMI all surprised on the downside. The Markit flash estimate declined from 54.0 to 52.9, with only a moderate decline in new orders. However, new export orders dropped into contractionary territory at 48.9 from 50.5. The weakness in export orders suggests that the US manufacturing sector is feeling the pain from declining global demand more than deterioration in domestic demand – at least for now.
Next week in the US we are due to receive data for core PCE on Friday. Being the Fed’s preferred inflation measure, we will look to this to see whether inflation continues easing. Danske expect to see increases of 0.1% m/m and 1.8% y/y, well within the Fed’s confidence band, allowing the Fed to focus on the second part of its mandate – employment. On the same note, a few Fed speeches are scheduled for next week. Danske do not expect them to add much new information, following Ben Bernanke’s press conference after this Wednesday’s FOMC meeting.
Moreover, we will get data for durable goods orders for May. After last month’s disappointing reading, Danske expect to see some rebound, with headline orders rising 0.7% m/m. Overall, the manufacturing sector has been holding up over the past few months but we might start seeing weakness, as global uncertainty hampers exports. On the same note, we are due the third estimates for second-quarter GDP and private consumption. Danske do not expect to see any major revisions from the last release.
Finally, Danske expect consumer confidence measures to take a hit, as the European debt crisis and weakness in the labour market start to take their toll on US optimism. Danske expect University of Michigan confidence to remain unchanged at 74.1, after having posted a significant fall in the first release of the June figure (this is the second release for June). Danske expect Conference board confidence to fall only moderately to 63.5.
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