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Published byDiane Murphy Modified over 9 years ago
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Ian Shepherdson Chief Economist Pantheon Macroeconomics September 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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