U.S.: Fed hike in December now more likely
The Federal Reserve left the target Fed Funds rate unchanged at 0.25% - 0.50%, but signaled that a hike in December was likely. The accompanying statement read “The Committee judges that the case for an increase… has strengthened but decided… to wait for further evidence of continued progress toward its objectives.” Three dissenters, an unusually high number, wanted to increase rates immediately. Furthermore, the “Dot Plot” indicated that 14 of 17 meeting participants expect a rate increase this year, making the likelihood of a December hike greater than 50%. Looking into 2017 however, the dot plot showed expectations of only two hikes to a median of 1.1%, as opposed to the June plot which projected three hikes to a median of 1.6%. Recent data has not supported the case for a hike. Retail sales fell -0.3% m/m in August, the first loss since March, bringing the y/y rate down to +1.9% from +2.4% last month. “Core” sales, which go into the GDP calculation, were down -0.1% m/m for the second consecutive month to +2.8% y/y. Industrial production fell -0.4% m/m in August to a -1.1% y/y rate, the 12th consecutive negative y/y reading.
EU: More investment to boost growth
Last week, in his State of the Union Speech, EU Commission President Juncker announced a doubling of the Investment Plan for Europe to EUR630bn by 2022. Supporting both infrastructure projects and SMEs, the European Fund for Strategic Investment (EFSI), the special vehicle created in 2015 to drive the plan, has already helped to raise EUR116bn (50% of what was planned) for infrastructure projects in 26 EU countries and has financed preferential loans for more than 200,000 SMEs. Assuming the Plan is fully implemented and generates the expected amount of investment, it is forecast to double the pace of annual nominal investment growth to above +5% while the impact on real GDP growth in the EU is predicted at an additional +0.5pps on average per year up to 2022. If the implementation continues at its current pace, the growth boost would be more limited to +0.3pps per year. Sectors most concerned by this investment boost are SMEs, R&D and Innovation, Energy and Transport. The countries to have benefited the most up-to-date are the UK, Italy and France.
Russia: No surprises in Duma election
Preliminary results show that the ruling United Russia (UR) party, supported by President Putin, took 54% of the vote in last Sunday's parliamentary election, securing a three-quarter majority of 343 seats out of 450 in the Duma (lower house). Other parties represented in the Duma will be the Communists (13%, 42 seats), the nationalist LDPR (13%, 39 seats) and the party A Just Russia (6%, 23 seats) – all three are considered as government-friendly and have supported most policy initiatives of UR during the past legislative period. The rebound in support for UR from 49% (238 seats) in 2011, in the process recapturing the constitutional majority it had lost then, reflects a recovery of Putin’s popularity. However, it also masks an increasing voter apathy as reflected in the drop of voter turnout to just 47%, the lowest since Putin came to power in 2000. Large anti-government protests as seen after the polls in 2011 are not to be expected this time, even though there were some reports of electoral fraud. Euler Hermes expects continuity of Kremlin policies and politics.
The Bank of Japan (BoJ) unveiled a new strategy called “Quantitative and Qualitative Monetary Easing with Yield Curve Control” (QQEYCC), which is broadly a fine tuning of the previous “QQE with a Negative Interest Rate”. The arsenal of interest rates was reinforced to get more control on the yield curve. While the short-term policy rate remains at -0.1%, for now, the BoJ announced that it will now guide the yield on 10-year JGBs to zero (recently close to -0.3%) in order to support banks’ profitability. Regarding asset purchases, JGBs with a wide range of maturities will be qualified now. Moreover, the BoJ will apply an inflation overshooting framework in which it commits itself to increase the monetary base until y/y CPI inflation stabilizes above the price stability target of 2% (thus abandoning its monetary base targeting). Looking ahead, Euler Hermes forecasts GDP growth to strengthen gradually to +0.7% in 2016 and +1% in 2017 and a progressive improvement of average annual inflation from 0% in 2016 to +1.5% in 2017.