Daily Commentary BY THE CURVE TEAM –

Domestic Data Deteriorates as US Monetary Policy Uncertainty Grows

11th of January, 2019

The deterioration in the domestic data has resumed over the past couple of days and it isn’t good news for the construction sector. Meanwhile uncertainty over the outlook for the Fed continues as disquiet amongst Fed members intensifies.

The positive tone from the trade balance earlier this week quickly faded after back to back negative releases related to the housing market. On Wednesday we saw a further collapse in building approvals which fell almost 10% in November alone to be more than 30% down from their peak. This was followed up by today’s Construction PMI which has plunged further below 50.

This mornings data showed that the construction PMI fell to its lowest level in 5 years driven by a collapse in activity. New orders are also falling at a faster pace suggesting the outlook will remain weak while selling prices are also falling sharply.

Today’s data could provide a brief relief with retail sales due out at 11:30. Early indications from online sales indices are that November sales held up ok thanks to sales events such as the black Friday sales and cyber Monday. However those same indices along with foot traffic trackers suggest December and January so far have been dismal for retailers.

Offshore, there is growing disquiet amongst Fed members. Chairman Powell is having a tough time getting his message straight, telling the Economic Club in Washington that “you should anticipate that we’re going to be patient, and watching, and waiting, and seeing.” He also said on the topic of the Fed’s balance sheet that is should be “substantially smaller” than where it is now.

It suggests that if we are to see a pause in the normalisation of monetary policy it will the cash rate that stops rising rather than the balance sheet that stops shrinking.

On the pace of rate hikes, there is a growing divergence in opinion on what the Fed should be doing.

While we know the New York Fed President John Williams sees justification for more hikes ahead, noted interest rate dove James Bullard of the St Louis Fed thinks the Fed is on the “precipice of a policy mistake.” Meanwhile Charles Evans of the Chicago Fed, who still sees three more hikes, said that the Fed could easily look at up to 6 more months of data before hiking again.

It sets the scene for an interesting meeting for the FOMC at the end of the month.

David Flanagan

Director - Interest Rate Markets