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ECONOMIC DATA ANALYSIS - US AVERTS FISCAL CLIFF FOR NOW,
ECONOMIC DATA ANALYSIS FRIDAY 4 JANUARY 2013
US AVERTS FISCAL CLIFF FOR NOW,
AS FOCUS SHIFTS TO ECB
• US Congress swaps one fiscal deadline for another
• ECB and MPC expected to keep policy unchanged
• RPI methodology about to change?
The last gasp agreement to prevent the US economy plunging over the ‘’fiscal cliff’ ensured that markets got off to a positive start in 2013. Risk assets surged, with the S&P posting its strongest one-day gain on Wednesday since December 2011. But there is concern the improvement could be short-lived as the failure to address public spending cuts or the debt ceiling suggests that Capitol Hill has merely swapped one fiscal cliff for another. Having been seen to relent on tax increases for the most highly paid, Republicans are poised to dig in their heels over public spending cuts. The stage looks set for another two months of acrimonious debate with the threat of government shutdown, or in extremis, official default still hanging over the market.
Other global equity markets followed the US’s lead, notably with the FTSE 100 breaking above the 6,000 level for the first time since July 2011. Risk assets were also supported by a spate of generally better economic data. US payrolls rose by a further 155k in December, while various surveys suggested business confidence was improving - a finding backed up in the UK by our Business Barometer and Business in Britain surveys.
But while equity markets started the year on a strong note, bond markets have sold off sharply. At the time of writing, 10-yr US Treasury yields are trading around 20bp higher on the week, at 1.92%, while 10-yr gilt yields are up 25bp, rising above 2.0% for the first time since May. The minutes of the December FOMC meeting added to the bearish tone, with “several” committee members stating that it “may be appropriate to slow or stop (asset) purchases well before the end of 2013”.
Looking ahead, the markets face a busy week, dominated by central bank meetings in Europe. Following hints at last month’s press conference, there is a possibility that the ECB could announce a 25bp reduction in its main refinancing rate to 0.5% on Thursday. Our central call, however, is that it will await further economic evidence. Similarly, we expect no change in policy following the MPC meeting, also on Thursday. With forward-looking surveys generally turning higher, inflation on an upward trajectory and risk sentiment improving, the case for further stimulus is not pressing. Still, event risk in the US and Europe and the continued weakness of UK aggregate demand leave open the possibility of further stimulus later this year, most likely following the appointment of Mark Carney as BoE Governor from July.
Data-wise, the coming week’s calendar is dominated by manufacturing and external trade data. This will provide further insight into the prospects of Q4 GDP in many countries. German factory orders (Tues) are expected to have dropped back following the 3.9% surge the previous month. But German industrial production, which lags orders, could post a decent rebound after a 2.6% drop in October. Similarly, given the improvement in the manufacturing PMI over the past couple of months and a rise in oil output, UK industrial production should post a better outturn. Elsewhere, the US and China trade data will also be watched for signs of further global rebalancing. We expect little change in either. External trade data are also due in the UK, while China releases its latest CPI inflation report on Friday.
Lastly, the UK National Statistician is scheduled to deliver an eagerly awaited announcement on Thursday on whether to recommend a change in the methodology for calculating the RPI. The potential change relates to the way prices are averaged to measure RPI inflation. If, as expected, a change is recommended along the lines of the CPI calculation, it could deduct almost 1% from RPI inflation over the coming year, with far reaching implications for index-linked gilts andbother inflation linked instruments.
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