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ECONOMIC DATA ANALYSIS - US TAPERING DRAWS NEARER?
ECONOMIC DATA ANALYSIS FRIDAY 24 MAY 2013
US TAPERING DRAWS NEARER?
• Asset markets: the start of a protracted turn lower or a pause for breathe?
• Bernanke ties prospects for tapering on near-term data
• Lloyds Business Barometer watched for further sign of improving UK confidence
It has been a roller-coaster week for global asset markets, as concerns over the US monetary policy outlook and weak data in China buffeted sentiment. Japan’s Nikkei dropped by over a 1000 points (7%) on Thursday, bringing an abrupt halt
to a stellar rally that had pushed the index up over 80% (to a peak of 15627) since last November. Other major benchmark equity indices also fell back sharply, having reached new record or multi-year highs earlier in the week.
In the bond market, yields generally rose, while risk currencies came under pressure. By the end of the week, 10-yr Treasury yields were trading around 6bp higher, re-testing mid-March’s high just above 2%. Similar rises in yield were seen in the UK, with the 10-yr benchmark closing at 1.93%. Amid heightened volatility, sterling ended lower across the board, weighed down by sizeable drops in UK April inflation (2.4%) and retail sales (- 1.3%). At the time of writing, GBP/USD is trading just above 1.50 and GBP/EUR around 1.1650.
The abrupt shift in market sentiment followed Fed Chairman Bernanke’s testimony to the Joint Economic Committee on Wednesday and news that China’s ‘flash’ manufacturing PMI had fallen to a 7-month low. The prospect that the world’s largest economy may start to restrict liquidity support at the same time as the world’s second largest economy may be slowing proved a toxic combination for investors - especially in Asia.
It remains to be seen whether this marks the start of a more protracted turn for asset markets or just a healthy correction. But on our take of recent developments, market reaction looks overdone. Chairman Bernanke’s comments were more balanced than the negative headlines suggested, while the impact of the Chinese PMI seems disproportionate. Nevertheless, it serves to highlight just how febrile market sentiment has become
The coming week should offer some respite. There are bank holiday weekends in the US and UK, and little in the way of key data or events. With a decision on tapering crucially dependent on the prospects for economic activity and the labour market over the coming months, the personal spending, Chicago PMI, pending home sales and consumer confidence surveys will allnbe read closely for inferences about Q2 growth. Overall, we doubt these data will materially change the picture, with the following week’s more important non-farm payroll & ISM reports entering the market’s radar. In the UK, the optimism that greeted the initial release of the 0.3% rise in UK Q1 GDP has since
been tempered somewhat by the revelation that the improvement was largely due to inventories, with growth remaining highly unbalanced (business investment fell 0.4% in Q1 and the trade deficit widened). The sharp drop in April retail sales suggests Q2 got off to a weaker start. Nevertheless, business confidence has shown an encouraging improvement. Our latest Business Barometer (Thursday) will reveal whether this was sustained in May. Over the course of the week, M4, CBI distributive trades and GfK consumerconfidence are also released (see back page).
Elsewhere, Japan’s manufacturing PMI for May will attract attention, as markets continue to g auge the success of the government’s stimulus efforts. Further signs that Japan is entering a robust upswing should help soothe nerves. In the euro area, region-wide inflation and unemployment data are due for May. Euro area inflation dropped back to a 3-yr low of 1.2% in April, while the unemployment rate hit a new record high of 12.1%. The coming week’s figures are expected to be little changed, and unlikely to prompt much market reaction given recent national data.
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