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Economics Weekly - Ship ahoy! Markets eye QE2 on both sides of the Atlantic...
Economics Weekly 20 September 2010
Ship ahoy! Markets eye QE2 on both sides of the Atlantic...
In the UK, the focus will be Septemberâ€™s Bank of England MPC minutes. In terms of the vote, we expect to see a repeat of the last three outcomes with Andrew Sentance advocating a 25bp hike in Bank Rate, but finding no support from other Committee members. Indeed, given the marked deterioration in recent UK data there is a small chance that Sentance might have backed off this month. The minutes will also be scrutinised for any sign that the MPC may have moved closer to implementing further QE in an attempt to revive a recovery that is looking increasingly fragile. Recent data on retail sales, housing and the labour market have all surprised with their weakness, and forward-looking surveys are suggesting that growth over the next few quarters may even struggle to reach the fairly subdued levels projected in Augustâ€™s Inflation Report. Overall, however, we would expect that it would take a further round or two of disappointing
data releases for the MPC to begin seriously considering additional stimulus. Data-wise, itâ€™s a quiet week, with the public sector finance figures being the key release
In the US, the FOMC meeting and a series of key housing market indicators are the main highlights. We look for the Fedâ€™s statement to repeat its reference to keeping the federal funds rate at exceptionally low levels â€˜for an extended periodâ€™. And given the phrase in Augustâ€™s FOMC minutes that an additional QE programme would likely require the economic outlook to â€˜weaken appreciably furtherâ€™, the recent improvement in some US indicators suggests this course of action seems unlikely for the moment. Beyond this, after a sharp drop in existing home sales in July, we look for a modest rebound in activity to 4 million units, although it is far from clear that this â€“ if realised - marks the beginning of a housing market upswing. Labour market fragility and constrained credit supply still pose significant headwinds to recovery in the sector. Our US August new homes sales forecast, meanwhile, stands at 285,000 units. August durable goods orders data are also published this week. In many ways, it is â€˜big pictureâ€™ issues which are grabbing the headlines
In many ways, it is â€˜big pictureâ€™ issues which are grabbing the headlines at the moment in the eurozone. Examples include a new framework for supervising European banks and markets, along with the thorny question of sanctions for EU countries which persistently breach the rules on public deficit and debt. But in terms of economic data, this weekâ€™s German Ifo survey will take centre stage after last weekâ€™s poor ZEW economic sentiment survey (which gauges expectations six months ahead). Our September Ifo business climate forecast stands at 106.3, from 106.7 previously, essentially reflecting a pull-back in the expectations component - Germany has â‚¬80bn worth of fiscal consolidation to come through over the next four years. At the euro-wide level, meanwhile, this week sees the release of advance (September) PMI surveys, where we look for modest improvements in both the manufacturing and services sector indices.
This week, the Banco de Mexico is expected to keep rates at 4.5%, reflecting mild inflationary pressures and uncertainty over the strength of the US economic recovery. By contrast, we expect Brazil inflation to accelerate once again, growing 0.4% in August, supporting our forecast of further rate rises in 2010.
Lloyds TSB Corporate Markets Economic Research, 10 Gresham Street, London, EC2V 7AE, Switchboard: 0207 626 1500. www.lloydstsbcorporatemarkets.com Bloomberg: LLOY<GO>
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