Article / 22 August 2016 at 5:02 GMT

3 Numbers: Chicago Fed numbers seek to sustain US outlook

editor/analyst /
United States
  • Hopes that Chicago Fed data offers strong projection for Q3 US GDP growth
  • The 2-year Treasury yield isn’t pricing in a rate hike for next month
  • Brazilian shares near a two-year high based on hope for economic revival

By James Picerno

Monday’s a sleepy day for scheduled economic news. The main exception: the July report for the Chicago Fed National Activity Index. Meanwhile, keep your eye on the 2-year Treasury yield, which will be widely followed ahead of this Friday’s speech by Janet Yellen at the Jackson Hole conference.

In addition, the crowd will be closely watching Brazil’s Ibovespa stockmarket index, which is still pricing in an economic rebound.

US: Chicago Fed National Activity Index (1230 GMT) The macro trend in the US has been showing signs of firming up lately. A key source of support is the rebound in job creation in June and July.

The stronger run of data lately has boosted the Conference Board’s Leading Economic Index, which increased 0.4% in July – the third straight monthly gain. The increases suggest that “moderate economic growth should continue through the end of 2016”, said a researcher at the Conference Board last week.

Gold medal hopes: After a fierce recession, the Brazilian sharemarket is
hoping for an economic rebound to add strength to local shares. Photo: iStock

The brighter outlook is also resonating with the Atlanta Fed’s nowcast for Q3 GDP growth. The bank’s latest estimate (as of August 16) is projecting that Q3 growth will pick up to a strong 3.6% pace, sharply above Q2’s sluggish 1.2% gain.

Today’s Chicago Fed release offers new context for evaluating the Q3 outlook. The June update showed some improvement, with the three-month average bouncing up to -0.12 against -0.39 in the previous month. Growth is still running at a rate that’s below the historical trend, but at least it’s moving in the right direction again.

If today’s update for July can hold at the previous level or rise, the news will provide the optimists with more data for arguing that the Q3 outlook is still on the mend.

2-Year Treasury Yield New York Fed president Bill Dudley last week said that the US economy is minting more middle-income jobs, which suggests that the labour market’s recovery may finally be shifting into higher gear.

“The tide has begun to turn,” he said last week. “For the first time in quite a while, we are seeing gains in middle-wage jobs actually outnumber gains in higher- and lower-wage jobs nationwide.”    
Yet the Federal Reserve is still expected to keep interest rates unchanged at next month’s monetary policy meeting. Fed fund futures are currently estimating an 88% probability that the central bank will hold its policy rate at the current 25-to-50-basis-point range, based on CME data.

Some analysts, however, are looking for hawkish chatter from Fed chairwoman Janet Yellen on Friday, when she speaks at the central banking conference in Jackson Hole, Wyoming.

“We expect Yellen to deliver a stronger signal about the likelihood of near-term rate hike,” said the chief US economist at Barclays last week.

While we’re waiting, keep your eye on the 2-year Treasury yield, which is widely followed as the most sensitive maturity for rate expectations. For much of August so far, the 2-year yield has been holding above 0.70%, which reflects a moderate bounce after dipping under 0.60% last month.

If this yield trends higher in the days leading up to Yellen’s speech on Friday, the rise will be a sign that the crowd is again preparing itself for the possibility that the hawks are laying the groundwork for a rate hike in September.

Brazil: Ibovespa Stock Market Index The nascent but encouraging signs of recovery continue to bubble in Latin America’s largest economy, providing support for the country’s main stockmarket index.

The Ibovespa ticked lower on Friday, but the benchmark remains close to a two-year high, courtesy of this year’s strong rally. But political complications are again raising doubts about where equities, and the economy, go from here.

“Investors, who were very optimistic with Brazil’s rebound, are getting more cautious while waiting for real indications that it will be possible to pass the measures [to finance spending],” an analyst at brokerage Lerosa Investimentos told Bloomberg last week.

Nonetheless, there are a number of encouraging signs that the economy will soon break free of the recession that's still raging. Rising consumer confidence is one example. Another is the Leading Indicator of Employment, which rose for the fifth time in July. The bounce “suggests recovery up ahead, driven by the optimism currently surrounding the industrial segment,” said an economist at the IBRE, the group that publishes the leading indicator data.

The question is whether the stockmarket can continue to forge ahead. 

At the moment, it appears that we’re in a period of consolidating the recent gains. A break above 60,000, however, would signal fresh confidence that the macro outlook is still brightening.

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– Edited by Adam Courtenay

James Picerno
is a macro analyst/editor at Follow James or post your comment below to engage with Saxo Bank's social trading platform.


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