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Daily Insight

16 March 2016

Fed will likely wait to hike again…but for how long?

Despite better US data, we expect the federal funds rate to remain unchanged…

Since mid-February, US data has been improving, while risks related to international

developments have eased. Furthermore, the Fed has come closer to its dual mandate. The

labour market is nearing full employment and the Fed’s preferred measure of core inflation for

is moving towards the 2% target. Nevertheless, given that this improvement follows a very

weak start to the year in financial markets and global risks continue to linger, we think that

FOMC policymakers will not hike rates at Wednesday’s meeting.

… as impact of international developments on US economy is still uncertain

As well as global risks, financial conditions have been tightening over the last year and it is

still too soon to evaluate the impact on the economy. The Fed will likely maintain the phrase in

the statement “the Committee will closely monitor global economic and financial developments

to assess the implications for the labour market and inflation and for the balance of risks to the

outlook”. This will give it more time to monitor the incoming data.

Markets still not ready for rate hikes

FOMC policymakers were forecasting four rate hikes in December. We think that the Fed will

lower the pace of rate hikes in its dot plot in Wednesday’s FOMC meeting. Indeed, the

minutes of January’s meeting Fed members showed considerable uncertainty. The factors

that resulted in this uncertainty, including developments in emerging markets have not faded.

Some Fed members, including Governor Brainard and President Dudley are still concerned

about inflation expectations. We think an early resumption of rate hikes could trigger a new

upward leg for the US dollar and destabilise global financial markets an. This could further

tighten financial conditions and magnify the impact of Fed hikes.

Group Economics Macro & Financial Markets Research

Maritza Cabezas

Senior Economist

Tel: +31 20 343 5618

maritza.cabezas@nl.abnamro.com

Despite better US data, we expect the Fed to keep its policy rate unchanged at

the March meeting…

… as the impact of international developments on US economy is still uncertain

We think an early resumption of rate hikes could destabilise global financial

markets and think the Fed will remain on hold in coming months

US retail sales disappoint in February

2 Daily Insight – Fed will likely wait to hike again…but for how long?- 15 March 2016

US retail sales disappointing

US retail sales weakened, suggesting that consumers became more cautious amid the turmoil

in financial markets. February’s retail sales declined by 0.1%, after a revised 0.4% fall the

previous month. Spending on gasoline showed a sharp fall, likely reflecting the price fall. At

the same time, core retail sales, which are more closely related to the consumer spending

component of GDP, were flat coming down from an increase of 0.2% the previous month.

Furniture and electronics showed the sharpest fall.

Retail sales weak in February

% 3mo3m ar

Source: Thomson Reuters Datastream, ABN AMRO Group Economics

Furthermore, consumer confidence surveys, which had been holding up well until recently,

came down in February. If financial markets stabilize this could give consumer sentiment a

boost. We expect consumption growth to remain the main growth driver in the coming months.

However, its pace should slow down in the coming time. Given that Fed policymakers take

consumption growth into account in their monetary policy decision, we think that this report will

make FOMC members more cautious in resuming rate hikes in the near-term.

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Retail sales Core reatil sales control group

3 Daily Insight – Fed will likely wait to hike again…but for how long?- 15 March 2016

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Day Date Time Country Key Economic Indicators and Events Period Latest outcome Consensus ABN AMRO

Saturday 12/03/2016 15/03/2016 CN M2 money growth - % yoy Feb 13.3 13.7Saturday 12/03/2016 15/03/2016 CN New loans - CNY bn Feb 727 1200Saturday 12/03/2016 15/03/2016 CN Aggregate financing - CNY bn Feb 780 1841Saturday 12/03/2016 06:30:00 CN Retail sales - ytd yoy Feb 10.2 10.7Saturday 12/03/2016 06:30:00 CN Industrial production - ytd yoy Feb 5.4 5.6Saturday 12/03/2016 06:30:00 CN Fixed asset investment - ytd yoy Feb 10.2 9.3

Monday 14/03/2016 07:30:00 IN Wholesale price index - % yoy Feb -0.9 -0.2Monday 14/03/2016 11:00:00 EC Industrial production SA mom Jan 2.1 -1.0 1.2Monday 14/03/2016 13:00:00 IN CPI - % yoy Feb 5.2 5.5

Tuesday 15/03/2016 13:30:00 US Retail sales - % mom Feb -0.1 0.0 0.0Tuesday 15/03/2016 13:30:00 US Prod. prices index excl food and energy - % mom Feb 0.0 0.1Tuesday 15/03/2016 US NAHB home builders' confidence index Mar 58 59 59Tuesday 15/03/2016 JP Policy rate - % Mar 15 80.0 81.5

Wednesday 16/03/2016 13:30:00 US CPI Inflation - % mom Feb 0.0 -0.2 -0.2Wednesday 16/03/2016 13:30:00 US CPI Inflation - % yoy Feb 1.4 0.9 0.9Wednesday 16/03/2016 13:30:00 US CPI excl food and energy - % mom Feb 0.3 0.1 0.2Wednesday 16/03/2016 13:30:00 US CPI excl food and energy - % yoy Feb 2.2 2.2 2.2Wednesday 16/03/2016 13:30:00 US Housing starts - % mom Feb -3.8 3.2 3.0Wednesday 16/03/2016 14:15:00 US Industrial production - % mom Feb 0.9 -0.1Wednesday 16/03/2016 19:00:00 US FOMC rate decision lower bound Mar 16 0.25 0.25 0.25Wednesday 16/03/2016 19:00:00 US FOMC rate decision upper bound Mar 16 0.50 0.51 0.50

Thursday 17/03/2016 00:50:00 JP Merchandise trade exports - % yoy Feb -12.9 -3.8Thursday 17/03/2016 07:30:00 NL Unemployment rate Feb 6.5 6.5Thursday 17/03/2016 09:30:00 CH SNB 3-month Libor Upper Target Mar 17 -0.25 -0.25 -0.25Thursday 17/03/2016 09:30:00 CH SNB 3-month Libor Lower Target Mar 17 -1.25 -1.25 -1.25Thursday 17/03/2016 09:30:00 CH SNB Sight Deposit Interest Rate Mar 17 -0.75 -0.75 -0.75Thursday 17/03/2016 10:00:00 NO Policy rate - % Mar 17 0.75 0.50 0.50Thursday 17/03/2016 11:00:00 EC CPI Core yoy Feb F 0.7 0.7 0.7Thursday 17/03/2016 13:00:00 GB Policy rate - % Mar 17 0.5 0.5 0.5Thursday 17/03/2016 13:00:00 GB BoE size of asset purchase programme - GBP bn Mar 375.0 375.0 375.0

Friday 18/03/2016 06:30:00 NL Consumer confidence - index Mar -1 1Friday 18/03/2016 11:30:00 RU Key rate % Mar 18 11.0 11.0 11.0Friday 18/03/2016 US Univ. of Michigan cons. confidence - index Mar P 91.7 92.3 91.0Friday 18/03/2016 20:00:00 MX Policy rate - % Mar 18 3.75

Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected key variables and events)