Will the robust US recovery alter Federal Reserve’s policy stance?
The Federal Reserve convenes for a two-day policy meeting on Tuesday against the backdrop of a rapidly accelerating economic recovery.
In the weeks since the US central bank’s last gathering in mid-March, initial applications for jobless benefits in the world’s largest economy have fallen to their lowest level since the start of the pandemic and data has shown retail sales for March rose by the most in 10 months. Meanwhile, more than half the US adult population has now received their first coronavirus vaccination, paving the way for easing of social curbs across the country.
While Fed chair Jay Powell acknowledged this month that the US economy was at an “inflection point”, he has not strayed from his stance that monetary policy will remain ultra-accommodative until the central bank’s goals of a more inclusive recovery are realised.
Powell has also reiterated the Fed’s willingness to see inflation run above its longstanding 2 per cent target to make up for the prolonged period of undershooting it.
Investors will be watching closely at Powell’s press conference on Wednesday for any indication about the Fed’s thinking on the looming rise in inflationary pressures that could compel it to reduce its $120bn monthly asset purchase programme as policy rates remain tethered at close to zero.
Jim O’Sullivan, chief US macro strategist at TD Securities, said the Fed could begin to scale back the bond-buying programme as early as March 2022. However he does not expect the Fed to raise its policy rate until September 2024. “Tightening criteria are much stricter than tapering criteria,” he said. Colby Smith
Are there brighter times ahead for Europe’s economy?
European Central Bank president Christine Lagarde last week signalled that more data were needed to assess whether the eurozone economy was on the right path to recovery, despite noting a promising uptick in Covid-19 vaccinations.
But preliminary growth figures, to be released on Friday by Eurostat, are expected to show that eurozone gross domestic product contracted 0.8 per cent in the first quarter compared with the previous one, according to a Reuters survey. A fall in output would push the bloc into the second technical recession — defined as two consecutive quarters of GDP contraction — since the start of the pandemic.
Bert Colijn, economist at ING, described it as a “recession that seems purely the result of restrictive measures limiting output in certain sectors”, including hospitality and personal services, such as hairdressers, and pointed to brighter times ahead. “The fate of the eurozone economy is about to turn.”
Analysts at Nomura concur, forecasting an economic rebound starting later in the second quarter.
Data released at the end of last week bolstered such optimism, with activity in the eurozone services sector returning to growth this month for the first time since last summer despite continuing restrictions. The IHS Markit eurozone flash purchasing managers’ index for services rose to 50.3 in April, from 49.6 in March.
However the eurozone continues to perform poorly compared with the US and the UK because of its sluggish vaccination rollout, delayed reopenings and weaker fiscal support. Valentina Romei
How is China’s vast factory sector faring?
China’s manufacturing purchasing managers’ index for April, out on Friday, will be closely watched for signs of further expansion as the country’s economic recovery continues.
Factory activity in the country beat expectations to rise to 51.9 in March, according to official figures from the National Bureau of Statistics. A reading above 50 signals expansion.
That month’s data showed a rise in activity after the partial closure of factories early in 2021 because of Chinese new year, though many remained operating because of travel restrictions and high overseas demand for Chinese exports.
April’s manufacturing data will shed light on the unfolding nature of China’s industry and exports-driven recovery, which is expected to transition into higher household spending.
A survey of economists by Bloomberg forecast a slight dip for April’s data, to 51.6.
Data released earlier this month showed that gross domestic product leapt by a record amount year on year in the first quarter, though the rise was flattered by a contraction a year earlier due to the pandemic.
Quarter-on-quarter GDP growth of just 0.6 per cent fell well below expectations, raising questions over the pace of the recovery.
Non-manufacturing PMI data, also out on Friday and which leapt to 56.3 in March, will indicate the role of China’s services sector in the recovery. A Bloomberg survey also projected a small drop for April, to 56.
Christina Zhu, an economist at Moody’s Analytics, said earlier in April that the “pick-up in the services recovery is largely attributable to successful virus containment and the acceleration in vaccine distribution”. Thomas Hale