Flametree Abn Amro Wmc 27 Juli 2009

27 July 2009

Weekly Macro Comment Han de Jong, Chief Economist

The Fed’s exit strategy; global economy continues to improve •

Fed will not be in a hurry to exit

•

UK’s GDP disappoints in Q2

•

German Ifo suggests a bounce in German activity is imminent

•

Japanese exports perform strongly

Bernanke’s testimony Fed chairman Ben Bernanke testified to Congress last week.

All this suggests that the Fed is more likely to be too late than

Among other things, he spoke about the Fed’s exit strategy.

too early. Reading between the lines, this is what Bernanke

Many people have grown uncomfortable with the large-scale

confirmed in my opinion.

actions taken by policymakers and are wondering whether the stimulus can be withdrawn on time. Bernanke’s job last week

The question is, of course, what the consequences will be if

was to reassure the sceptics that everything is under control.

policymakers leave tightening ‘too late’. Many people fear that

He argued convincingly that the Fed has the tools. The Fed

inflation will rise if they are too late. That seems unlikely to me,

can withdraw liquidity through various measures and can push

at least as a first consequence. After all, it is not what

interest rates higher before it has withdrawn all emergency

happened last time around. Nor is it what has happened in

liquidity support should it wish to do so. As regards timing,

Japan despite concerted efforts by policymakers to stir up

Bernanke was less committal. He suggested an early

inflation. In addition, with the economy operating significantly

tightening is not likely. Again, I agree. Some market

below potential it is hard to see inflation emerging on a

participants worry that the Fed will not exit from its

sustained basis (perhaps barring a substantial sustained rise in

expansionary policy on time. ‘On time’ presumably means:

commodity prices). What is more likely in my view is that we

before monetary policy produces unintended effects.

get a repeat of what happened the last time the Fed left it ‘too late’: bubbles building. That is not necessarily a bad thing;

My take on this is that whatever Bernanke says, the Fed will

bubbles are nice. Well, at least as long as they do not get too

err on the late side. There are several reasons. First, the

big or too widespread and, of course, until they pop. During the

policymakers were late during the last cycle, so they do not

previous cycle, when bubbles emerged economists debated

have an unblemished record. The reasons why they were late

whether or not asset prices should play a role in determining

tightening earlier this decade (threat of deflation and a

monetary policy. Policymakers decided against it, partly

lacklustre response by the labour market to the general

because it is actually ambiguous to identify a bubble when it is

economic recovery) are likely to be characteristics of the near

building. Greenspan thought that it would be better to let

future as well.

bubbles develop and deal with the consequences if and when

Second, there are several examples of policy stimulus being

central banks will opt for a different approach this time. They

withdrawn prematurely. The consequences have been dire.

will try to develop a (perhaps in-house-only) framework for

After what the policymakers have done to save the system,

identifying bubbles and will tighten when they are convinced

they are unlikely to want to jeopardize the positive results by

that bubbles are emerging. I cannot see why this should not

an (overhasty) early exit.

work.

Third, the Fed fears deflation more than inflation. Their

Last week’s data

perception is that they know what to do about inflation but they

Last week’s economic data was generally positive, though

are not sure how to fight deflation. As deflation is very

there were a couple of exceptions. UK GDP numbers for Q2

destructive, the philosophy is to make sure not to let ‘it’

disappointed as GDP shrank 0.8% qoq. While that was a lot

happen.

better than the massive 2.4% drop in Q1, it was worse than

the bubbles burst. The rest is history. My guess would be that

expected. On the positive side, UK retails sales posted a stronger than expected rise in June: 1.2% mom. US consumer confidence according to the University of Michigan’s index was

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT

27 July 2009 also soft in July. It fell to 66.0 from 70.8 in June. The trough was reached in February at 56.2. The final reading for July was

South Korea: GDP growth

actually a little better than the initial reading released two weeks ago, suggesting that consumers have become more positive since that initial release.

% yoy

10 8

Against these negatives were lots of positive surprises. In the US, the leading indicators and existing home sales were stronger than expected. In Germany, the authoritative Ifo index of business confidence surprised on the upside. In July, the index jumped to 87.3, from 85.9 in June. The expectations component has shown a considerable rise for months and it rose again strongly in July (90.5 up from 89.5). More

6 4 2 0 -2 -4 -6 01

noticeably, the current conditions component showed an even larger improvement: 87.3, compared to 85.9 in June. This

02

03

04

05

06

07

08

09

Source: Bloomberg

suggests that an improvement in actual activity levels is imminent. Keep in mind that this improvement is from a low

Asia, once again, produced some strong data. South Korea’s

level. But it will look like a ‘V’ in a couple of months’ time.

GDP registered 2.3% growth qoq (non-annualised) in Q2. Japan saw impressive export numbers. The volume of

Germany: Ifo-index and industrial production

Japanese exports has risen strongly in each of the three

% yoy

index

months to June. Again, this is from a very low base as exports

10

120

had virtually collapsed. But still. This data confirms that

5

110

business conditions are firming around the world. We consider

0

100

it likely that economic data will continue to improve in the

-5

90

months ahead and will beat current consensus expectations.

-10

80

-15

70

-20

60

-25

50 00

01

02

03

04

05

06

Industrial production (lhs)

07

08

Japan: Export Volume, % yoy

30

09

20

Ifo (rhs)

10

Source: Bloomberg

0 -10

The advance estimates for eurozone PMIs were also surprisingly strong. The PMI manufacturing jumped from 42.6 in June to 46.0 in July, while the services sector PMI managed a more modest rise from 44.7 to 45.6.

-20 -30 -40 -50 04

05

06

07

08

09

Source: Thomson Financial

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ECONOMICS DEPARTMENT