Fed to shed light on frozen U.S. economy

BRUSSELS Sun Feb 16, 2014 4:37pm EST

A general view of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

A general view of the U.S. Federal Reserve building in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

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BRUSSELS (Reuters) - The Federal Reserve's stimulus taper and China's slowdown, twin factors behind this year's emerging market sell-off, will come firmly into view in the week ahead with minutes from the former and a leading survey on the latter.

After reassuring European growth on Friday and weak U.S. retail sales on Thursday, major data will be in short supply.

Moreover in the United States, where the impact of severe weather is still being determined, the Presidents Day holiday on Monday will shorten the working week.

The stand-out indicator may prove to be the flash Markit/HSBC Purchasing Managers' Index (PMI) for China, with the February number due for release on Thursday.

Last month's report showed activity in China's factories contracted in January for the first time in six months, suggesting a slowdown at the end of 2013 had continued into the new year.

The index sent a chill through growth-sensitive markets in Asia, depressing shares, commodities and the Australian dollar. China is the biggest export market of resource-rich Australia.

"If we get an intensification of China slowdown fears through these PMI numbers then that could set another unsettling tone to market sentiment," said James Knightley, senior economist at ING.

Economists are expecting another reading below the 50-level which denotes falling activity, although the survey covers the period of the lunar New Year holiday, meaning it may offer a less reliable view.

"If we do get another sub-50 reading you will see more stories about the China slowdown coming through. That may in itself lead to more concern about the prospects for global growth and emerging market activity in general," Knightley said.

Conversely, purchasing manager indices for the euro zone for both manufacturing and services, also due on Thursday, are seen stable to slightly higher.

They could provide a first indicator of whether an emerging market slowdown is weighing on Europe. January's survey showed the private sector in the single currency bloc started the year in much better shape than expected.

However, that survey was mainly conducted before currencies from the rand to the rouble tumbled on concerns about reduced growth and a shrinking of cheap money due to U.S. monetary tightening.

Germany's ZEW index of analyst and investor sentiment, due on Tuesday, should also add to picture. It is seen remaining at its highest level in nearly eight years.

FED VIEW ON FROZEN ECONOMY

In the United States, indicators are proving hard to interpret with large swathes of the country gripped by the polar vortex or the latest dump of fresh snow late on Thursday that wreaked havoc from Georgia to Maine.

Housing starts and existing home sales data due next week are likely to be no exception.

Are poor numbers a real sign of weakening demand or purely a product of the bad weather?

It is a key question for the Federal Reserve as it reduces its monthly purchases of Treasuries and mortgage-backed securities.

Janet Yellen, newly installed at the helm of the Fed, said last Tuesday that the central bank was on track to keep reducing stimulus even though the labor market recovery was far from complete.

Markets received a jolt last month with data showing U.S. employers hired the fewest number of workers in almost three years in December, while hiring in January was also muted.

The December numbers were likely central to the Fed's deliberations at its last meeting at the end of January. Minutes to that meeting are due to be released on Wednesday and should show how solid sentiment was within the committee behind tapering monthly bond purchases.

"My sense is that they may well look through the weak job numbers and remain optimistic," said Laura Rosner, economist at BNP Paribas.

One set of figures relatively immune to bad weather is inflation. There have as yet been few signs of a broad pick-up of prices even as the economy gathers steam.

U.S. consumer prices grew by 1.5 percent in December from a year earlier, a rate seen inching up to 1.6 percent in January, although core inflation, stripping out volatile energy and food components, is seen easing to 1.6 from 1.7 percent.

The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below CPI.

Persistently low inflation is expected to lead the Fed to hold interest rates near zero for a long time, although some economists believe higher home prices should gradually feed through into rents, driving up the basket of prices by the year end.

(Additional reporting by Jason Lange in Washington and Jonathan Standing in Beijing; Editing by Toby Chopra)

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Comments (5)
ctyankee57 wrote:
Central Banks both foriegn and Domestic are busy fighting deflation, yet the U.S. Fed has one banker still trying to resurrect fears of some distant furture filled with run away inflation. Before Regan Countries compeleted with the U.S. for a living wage, now the World must induce inflation to keep their economy from falling through the floor. How ironic.

Feb 16, 2014 6:06pm EST  --  Report as abuse
zeddd wrote:
The end of cheap energy is the end of growth. Its that simple.

Feb 16, 2014 7:00pm EST  --  Report as abuse
nose2066 wrote:
The assumption here is that the actions of the Federal Reserve still affect the U.S. economy. With globalization, and the outsourcing of jobs to foreign countries, the actions of the Federal Reserve may no longer be relevant to the economy. Cheap money may stimulate demand, but that demand might be met by products and services produced somewhere else.

Feb 16, 2014 8:49pm EST  --  Report as abuse
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