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ECONOMIC DATA ANALYSIS - A DIFFICULT BALANCING ACT FOR BERNANKE
ECONOMIC DATA ANALYSIS FRIDAY 14 JUNE 2013
A DIFFICULT BALANCING ACT FOR BERNANKE
• All eyes on Fed Chairman Bernanke’s FOMC press conference mid-week.
• King’s last Mansion House speech tops important week for UK economic releases.
• Euro area PMIs to signal continued contraction as finance ministers meet.
Market volatility as policy debated ... Markets have endured another volatile week, with the yield on the US 10-year Treasury moving above 2.20% for the first time in a year; the Nikkei-225 has come under further downward pressure and $/Y has dropped below 95. Domestically, ongoing signs of economic improvement have contributed towards a rise in bond yields, while the FTSE-100
has fallen further. Overall, mixed economic data have added to market volatility, but policy uncertainty has been paramount. The coming week sees key policy statements from the US (FOMC meeting), Japan (Kuroda speech) and UK (Mansion House speech and MPC minutes), as well as various forward-looking indicators to guide growth expectations.
US FOMC announcement ... The FOMC announces its latest policy decision on Wednesday. We expect no change. The tone of the statement and the Fed ’s economic projections are likely to be similar to those of the last meeting (with some downside risk to the inflation outlook). However, Fed Chairman Bernanke faces a challenging press conference. Given the recent improvement in the US economy, it will be difficult for the Fed Chairman to be less committal about the prospects of tapering. But he will be acutely aware that any suggestion that the US policy cycle may soon be on the turn could send bond markets into further paroxysms. Accordingly, we expect Mr Bernanke to stress that ‘tapering’ is not tightening and that, given the weak inflation outlook, the Fed is in no hurry to reverse policy. It will be a difficult balancing act, especially as the markets do not seem to be in a mood to heed this solace.
US manufacturing inventory effect.. A number of key US economic releases are also due. Our global team forecast a rise in the Empire State and Philly Fed surveys. It appears that voluntary destocking, as well as weak global demand, have slowed manufacturing output in recent months.mWith stocks having been lowered, we expect these surveys to corroborate some improvement.
Mansion House & MPC minutes ... Domestically, a busy economic release calendar is supplemented with the Mansion House speech. As well as comments from Chancellor Osborne, this is likely to be Governor King’s valedictory.
With June’s MPC minutes due on the same day markets will focus on any clues to the policy outlook under new Governor Carney. CPI and PPI inflation are also published this week. We expect the former to rise to 2.6% from 2.4% last month.
However, strong sterling and lower oil prices have improved the inflation outlook. We now think it will be a close call whether inflation tops 3% again this year. Retail sales look set to post a 1.3% rise in May, following a steep decline in the previous month. May’s public finances are also due.
PMIs still point to contraction ... Although a quiet week for euro area data, our global team expects a dip in June’s preliminary PMIs and the German ZEW. These still signal a broader euro area contraction in Q2. We still expect some stabilisation in H2 2013 - rather than recovery. Finance Ministers meet at the end of the week. In part, this will be in preparation for the leaders’ meeting the following week, where banking supervision and resolution are on the agenda.
RBA and BoJ... Finally, we will watch the RBA minutes on Tuesday and BoJ’s Kuroda speech on Friday for further insights into the policy outlook in Australia and Japan. The RBA could well use the minutes to signal the prospect of a further rate cut over the next two months. Kuroda faces a bigger challenge. While we expect nothing new at this stage, markets will watch for any attempts by the BoJ Governor to renew the downward pressure on the yen.
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