Ian Shepherdson Chief Economist Pantheon Macroeconomics September 11, 2015 How will the ECB respond...
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![Page 1: Ian Shepherdson Chief Economist Pantheon Macroeconomics September 11, 2015 How will the ECB respond to Fed tightening? U.S. Rates and Europe:](https://reader036.fdocuments.us/reader036/viewer/2022062519/5697c0231a28abf838cd4227/html5/thumbnails/1.jpg)
Ian ShepherdsonChief EconomistPantheon MacroeconomicsSeptember 11, 2015
How will the ECB respond to Fed tightening?
U.S. Rates and Europe:
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1. Can the Fed hike when industry is weak?
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2. First came the hit from collapsing oil capex…
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3. …And now the strong dollar is biting, hard
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4. …China’s slowdown is beginning to hurt too
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5. But China’s economy is not in meltdown…
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6. …Stock market lunacy did not infect manufacturing
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7. U.S. Consumers, meanwhile, are awash with cash…
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8. …Don’t be misled by “weak” nominal retail sales
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9. Auto sales are booming
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10. The housing market is recovering strongly…
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11. …And non-residential construction is soaring
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12. The contrast between industry and the rest is huge
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13. Most people don’t work in manufacturing…
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14. …And most companies don’t export anything
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15. Those which do, sell more to Europe than China…
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16. Unemployment is now too low for the Fed’s comfort
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17. …And it hasn’t stopped falling yet
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18. Even broad rate is heading for previous hike levels
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19. Hourly earnings are weak; better wage data are not
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20. Core inflation today is not the problem
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21. Some goods prices are falling; CPI is mostly services
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22. Rents likely will accelerate much further
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23. Some goods prices are immune to the strong dollar
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24. And Obamacare won’t depress medical costs forever
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25. A small rise in rates won’t kill the U.S. economy…
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26. …But the legacy of the credit boom lingers
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27. Corporates also can’t cope with prior rate peaks…
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28. …Gross corporate leverage remains extremely high
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29. Europe is enjoying a sustainable cyclical upswing
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30. Performance is uneven but rising tides lift all boats
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31. Structural problems remain severe…
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32. …But parts of the periphery have made great strides
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33. …And their sacrifices are paying off…
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34. …Though from a very depressed base
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35. But the French labour market remains sclerotic
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36. Deflation risks are fading…
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37. …But the recovery is still fragile
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38. So the ECB won’t be following the Fed
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39. EZ yields will be pulled by the U.S., but not as far…
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40. …So the Euro will weaken further
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40. The Great U.S. Normalization is Coming
• U.S. interest rates will soon start to rise; eventually, the Fed will have to move even if markets are volatile.
• The labor market is tightening rapidly – much faster than the Fed expected – and core inflation and wages are set to rise.
• Europe still has a business cycle, and the core Eurozone will surprise to the upside next year.
• The ECB will not follow the Fed, so the euro will weaken deflation fears will fade, and long-term rates will rise.
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