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ECONOMIC DATA ANALYSIS - MARKETS SUPPORTED BY POLICY AS RISK SENTIMENT FADES
ECONOMIC DATA ANALYSIS FRIDAY 1 MARCH 2013
MARKETS SUPPORTED BY POLICY AS RISK SENTIMENT FADES
- MPC looks set to endorse a further £25bn of QE, but expect a very close call.
- ECB to leave policy on hold amid mixed messages on economic outlook.
- Fiscal uncertainty to cloud the US outlook, but labour market resilient.
Financial markets change tone ...Italian elections have contributed to a change in direction for financial markets. This is evident in the re-widening of peripheral euro area sovereign spreads, a fall in the euro and a drop in ‘core’ bond yields. Markets have been reminded of the ongoing fragility of the euro area situation.
Additionally, the passing of the US sequester deadline today suggests at least some of the $85bn in spending cuts will bite in Q2 and Q3 this year. Yet after initial selling, equity markets have recovered some poise, underpinned by
central bank stimulus. The coming week focuses on central banks with the MPC, ECB, BoJ, Bank of Canada and RBA making policy decisions.
MPC to endorse further QE ... In the UK, we believe that the MPC is, on balance, likely to provide additional stimulus at Thursday’s meeting. Governor King’s vote for an additional £25bn of QE last month is likely to resonate. Members Tucker and McCafferty have sounded open to the prospect of more QE recently. Moreover, the deterioration in the international outlook - including Italian and US developments - and some softening in domestic indicators (with the services PMI survey expected to echo the weakness in manufacturing) could sway additional members. That said, this will be a close call and we expect a split Committee. We also forecast only a modest £25bn stimulus. Market reaction will be interesting with concerns about inflation prospects threatening to offset the downward pressure additional BoE demand should put on yields. Nevertheless, additional easing would put the MPC back in line with the Fed and the BoJ, and should keep sterling on the back foot.
BoJ awaits new Governor ... The Bank of Japan makes its latest policy announcement earlier on Thursday. Japanese policy has seen significant
developments recently but the coming meeting, Governor Shirakawa’s last, is unlikely to see any change. With the official nomination of Kuroda
as successor - a long-term critic of BoJ policy - markets will focus on the following week’s Parliamentary hearings, ahead of his first meeting on 4 April, for any clues of more decisive easing.
ECB - hemmed in ? ... The ECB also makes its latest policy announcement on Thursday. Despite some calls for a further refi rate cut, we do not expect a change this month. But a case can be made for further easing. Medium-term
forecasts released at this month’s meeting are likely to suggest protracted sub-target inflation and downside economic risks. But a further 0.25% reduction in the refi rate alone would provide little extra stimulus. The ECB’s policy preference has been for activation of its OMT bond-purchase policy. However, the Italian elections present a worst-case risk: A lack of clear government and associated commitment to reform might stop Italy meeting the conditionality necessary to activate the ECB’s OMT. This risks hemming ECB policy in until a more pragmatic solution is found.
The impact of fiscal uncertainty ... With little hope of avoiding its sequester deadline at the time of writing, the outlook for US growth is clouded. The fiscal debate will continue to dominate this week. Yet indicators have been mixed recently. Wednesday’s Beige Book will give an additional view on how much uncertainty is weighing on different sectors of the economy. That said, market focus will be drawn to Friday’s payrolls. Our global team forecasts an above consensus 175k rise and for the unemployment rate to dip to 7.8% as household employment rebounds. With Fed officials holding different views on the appropriateness of the current policy, this will be the more policy relevant statistic. That said, there is little sign that the Fed will ease up on policy loosening any time soon
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