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Time for the Fed to catch up?

| Posted by: Paul Donovan | Tags: Paul Donovan

  • The employment report in the US is likely to suffer some ill effects from the light dusting of snow experienced in some parts of the US. We believe this will limit the gain in non-farm payrolls (staying at home wrapped in a duvet and hiding behind a snowdrift does not constitute a contribution to payrolls).
  • US unemployment is likely to drop, and average hourly earnings are forecast up 0.2%. Unit labour costs remain a better guide to inflation pressures. Nevertheless, above trend economic growth, falling unemployment and rising labour costs are not consistent with a declining real Fed funds rate (which is what will happen unless the Fed starts raising).
  • The ECB (which sets itself the readily ridiculed target of inflation below 2% but near 2%) forecasts inflation of 1.8% by the end of next year. That would seem to suggest that the quantitative policy program scheduled to end in September 2016 should end in September 2016.
  • Draghi of the ECB was full of concerned support for the liquidity needs of the Greek banking system, just so long as he was not expected to accept Greek government bonds as collateral. He appears to be attempting to avert a liquidity problem without signalling support for the negotiations over restricting the Greek bailout program.