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ECONOMIC DATA ANALYSIS - BERNANKE IN THE SPOTLIGHT
ECONOMIC DATA ANALYSIS FRIDAY 17 MAY 2013
BERNANKE IN THE SPOTLIGHT
• Key week for US monetary policy with Bernanke’s JEC testimony and FOMC minutes
• A busy week for UK data, with risks of a downward revision to Q1 GDP
• Euro area ‘flash’ PMIs suggest ongoing recession in Q2, EU Summit in focus
Global softness weighs on activity ... The jury remains out on the pace of global recovery - particularly in the US. While domestic indicators show encouraging signs of improvement, external-facing indicators, including recent forward-looking surveys, have been less upbeat. Barometers of global trade such as Taiwan and Singapore, corroborate this, posting soft growth in Q1. This may account for some of the more recent softness in other trade-sensitive economies, like Germany. The coming week is likely to provide further evidence of this. Moreover, our outlook suggests modest yield retracement in most areas, particularly the UK.
US monetary policy focus ... Monetary policy developments have the most potential to impact markets over the coming week. Fed Chairman Bernanke’s testimony to the Joint Economic Committee will be key. Markets will watch for clarification of Bernanke’s recent comments identifying risks to financial stability from too long a period of accommodative policy. Three weeks after introducing a more symmetric outlook for future Fed asset purchases, we doubt the Fed Chairman wants to talk up the prospect of tapering. And FOMC minutes, while slightly dated, will detail the discussions surrounding the latest change to the Fed ’s outlook. However, discussion of medium-term risks seem consistent with our view that tapering will occur soon after the economy accelerates, which we expect in H2. Economic releases, including home sales figures, are likely to confirm an upbeat domestic economy, while the preliminary PMI is likely to paint a softer industrial activity outlook, reflecting global issues and/or inventory unwind.
UK Q1 revised down to 0.2%? ... We have a dovish take on the week’s domestic releases. Focus turns to MPC minutes on Wednesday. We expect the vote to remain unchanged at 6-3, although acknowledge a risk that one or two members, including the Governor, may have rejoined the majority following the Bank’s more upbeat economic assessment in the Inflation Report. Separately, we forecast Q1 GDP to be revised a little lower to 0.2%, expecting March’s services output to be a touch softer than first estimated. We also forecast a dip in CPI inflation to 2.6% this month as firmer sterling, lower petrol prices and the impact of Budget changes delay the medium-term pick-up in inflation we expect. Retail sales could also come in below consensus. We still expect GDP to expand by 0.8% in 2013,
which should support a medium-term rise in yields, but this week should see a small dip.
Surveys point to ongoing EU recession ... Unlike the US, the euro area also suffers from weak domestic demand. The spread of economic contraction to ‘core’ economies, including the Netherlands and France, will have additionally weighed on Germany. German GDP – published on Friday - will provide a breakdown of the components of growth for Q1. Preliminary estimates of May’s PMIs will provide the latest forward-looking updates, along with the German
IFO survey and French business indicator the following day. We expect the euro area PMIs to rise a touch, buoyed by some rebound in Germany. Yet these remain consistent with contraction in Q2. This may resonate in the upcoming EU Summit. Technical discussions surrounding banking union, taxation and the EIB are likely. But broader discussions should include structural reform and deficit targets.
Japan outlook improves ... After stronger than expected Q1 GDP, we have raised our 2013 growth forecasts to 1.6%. BoJ and government monthly reports are likely to reflect this more upbeat tone. The BoJ meeting on Wednesday is unlikely to add anything, with the focus turning to the impact of fiscal stimulus (expected in Q2) and Abe’s reform package - the “third arrow”
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