Friday February 22, 2013 - 16:31:37 GMT
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ECONOMIC DATA ANALYSIS - EVENT RISK LOOMS LARGE AS SPOTLIGHT TURNS TO BERNANKE
ECONOMIC DATA ANALYSIS FRIDAY 22 - 28 FEB 2013
EVENT RISK LOOMS LARGE AS SPOTLIGHT TURNS TO BERNANKE
• Italian elections, Fed testimony and the looming sequestration deadline pose key risks
• Further UK monetary stimulus back on the agenda as Governor breaks ranks
• A quieter week for data, but manufacturing PMIs will be watched for steer on Q1 growth
Another topsy turvy week... It has been another volatile week for markets, dominated by further signs of economic weakness in Europe and contrasting policy minutes from the Fed and BoE. Disappointing euro area ‘flash’ PMIs and jitters that Berlusconi could spring a surprise in this weekend’s Italian election brought an abrupt end to the euro’s recent surge, with EUR/USD dropping back below 1.3250
Pound dives on heightened possibility of more QE... Sterling, however, was the main currency in play. The surprise revelation that the Governor and two other MPC members had voted for an immediate £25bn expansion of QE at the
February MPC meeting pulled the rug from under the pound. The UK currency fell to a near 3-year low of 1.5132 against the US dollar. The potential for further UK monetary stimulus is now firmly back on the agenda. The coming week’s TSC appearance by MPC members Bean, Tucker, Miles and McCafferty, will be watched closely.
Market spooked by talk of Fed’s early exit... In contrast, the minutes of the latest FOMC meeting highlighted that a number of members had raised the possibility that the QE programme (amounting to $85bn of asset purchases each month) may have to be wound down early, given the risks to economic stability of the Fed’s ballooning balance sheet. The news dragged equities lower and provided further fuel for the US dollar.
Italian elections pose key event risk... Exit polls from this weekend’s Italian general election are expected from Monday evening. Although Berlusconi is coming up the rails, and could conceivably hold the balance of power in the Senate, the most likely outcome is still that Bersani will secure enough votes in both chambers to form a coalition. From a market perspective, this would be the most favourable outcome. If Berlusconi secures the balance of power, peripheral spreads would almost certainly shoot higher.
Spotlight turns to Bernanke... Market focus will shift to Bernanke on Tuesday as the Fed Chairman gives his key biannual testimony to Congress. His comments will be scrutinised amid growing fears that the Fed is contemplating an early tapering of its QE programme. Although we believe market concerns are overblown, this issue is likely to continue to dominate policy discussion over the coming months. However, we expect Bernanke to attempt to calm sentiment by emphasising his ongoing commitment to stimulus until the labour market has posted a “substantial improvement”.
Sequestration deadline looms next Friday... Still, the tone of his comments will be as revealing as their content - especially ahead of the looming sequestration deadline of 1 March. Failure of Congress to agree a compromise would trigger mandated spending cuts amounting to $1.2trn over the next ten years - potentially deducting 0.7ppt from US GDP growth this year.
Economic data likely to play second fiddle... The coming week’s US calendar includes consumer confidence, durable goods, the 2nd estimate of Q4 GDP and the manufacturing ISM. Recent forward looking indicators suggest the US has entered a steady upswing and, while mixed, the general tone of upcoming reports should support this (in particular, Q4 GDP is expected to be revised higher, from -0.1% to 0.9% saar and the February ISM to remain above 50).
Global manufacturing PMIs paint a mixed picture... In the euro area, the data calendar is confined largely to M3 money supply and the final manufacturing PMIs. Neither is expected to be big market movers, although the PMIs will be watched for confirmation of the downside risks to Q1 growth. Manufacturing PMIs are also due in the UK and China. Both are expected to hold above the key 50 level.
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