Treasury yields – moving inversely to prices – rose this week, after Federal Reserve Chair Janet Yellen signalled that a March rate hike remains on the table. Equity markets climbed too, with the S&P 500 touching a new record high.
Janet Yellen on Tuesday painted a positive picture of the US economy, during a semi-annual testimony before the Senate Banking Committee. Although she suggested that the outlook was uncertain, Yellen indicated that “waiting too long to remove accommodation would be unwise.” She highlighted that changes in fiscal policy could affect the economic outlook. Although the door is left open for a rate hike in March, Yellen’s testimony did not suggest any sense of urgency to hike rates. Indeed Fed policymakers have said that they are waiting for more clarity on fiscal stimulus before resuming rate hikes. We expect the Fed to hike rates three times this year: in June, September and December – although the chances of a March move have increased.
January’s headline retail sales in the US slowed down slightly to 0.4% month-on-month after a strong 1% growth the previous month. The slowdown came from a decline in auto sales, which fell 1.4% month-on-month in January (after a considerable increase of 3.2% in December). Otherwise, sales increased in most categories, particularly spending on gasoline. Meanwhile, core retail sales (excluding food, gas and building materials), which are more closely related to the consumer spending component of GDP, continued to show a sharp increase. This report shows that consumption remains solid. At the same time, consumer confidence surveys, which are more forward looking, have been at elevated levels. We have forecasted US GDP growth of 2.4% in 2017, mainly as a result of stronger consumption and investment growth.
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