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ECONOMIC DATA ANALYSIS - MARKETS BRACED FOR BERNANKE AND CARNEY INSIGHTS
ECONOMIC DATA ANALYSIS FRIDAY 12 JULY 2013
MARKETS BRACED FOR BERNANKE AND CARNEY INSIGHTS
• Fed Chairman’s Congressional testimony key to week’s market direction
• MPC minutes watched for clues of expected policy action in August
• China releases to suggest slower GDP growth continued
Volatility continues ...Markets continue to grapple with the uncertainties of central bank policy, particularly the US’s Federal Reserve. US 10-year Treasury yields rose above 2.70% at the start of this week after last week’s robust payrolls report. They fell 20bps to 2.53% over the week, helped by dovish comments from Fed Chairman Bernanke. With markets currently so sensitive to policy nuances, the coming week’s events will be important. Chairman Bernanke makes his semi-annual testimony to Congress; MPC minutes will detail BoE Governor Carney’s first meeting; Chinese data look set to confirm slower activity; and G20 finance ministers meet.
Fed Chairman in focus again ... The FedChairman’s semi-annual monetary policy testimony is always a key market event. Yet with financial markets so sensitive to the Fed’s policy outlook, the coming week’s statement is even more so. The rise in US yields accompanying the latest phase of communication appears to have left some FOMC members uncomfortable. Having seen some sharp sell-offs after previous updates, Chairman Bernanke is likely to be keen to avoid major yield increases this time. We expect the testimony to maintain the broad outlook for near-term tapering - although hope for some guidance over the criteria the Fed will use to judge this. Bernanke is likely to once again stress the difference between tapering and tightening and play down the significance of the 6.5% unemployment rate for the eventual tightening of policy (a threshold, not a trigger). Bernanke will hope that focusing on the still extended outlook for policy accommodation will soothe market fears. Additionally, a number of key economic releases are published in the coming week, including the Empire and Philly Fed surveys, retail sales and CPI inflation. We do not see these shifting the economic outlook sharply
Slowdown in China expected ... China posts its latest round of key economic releases, including Q2 GDP. We have shifted our growth outlook for 2013 as a whole lower, and are against the consensus view that quarterly growth accelerated in Q2. We forecast this to be stable at 1.6%, taking the annual rate to 7.4% from 7.7% in Q1. Finance Minister Lou recently suggested a tolerance for growth slowing to around 6½%, suggesting a policy response may not be forthcoming. G20 meeting ... Finance ministers and central bankers meet in Moscow at the end of the week. Already the Russian minister has highlighted concerns about market volatility, noting that members do not want abrupt changes in monetary policy. Discussions will continue to focus on methods to quicken global growth.
Details of Carney’s first meeting ... Monetary policy will also be the domestic focus. July’s MPC meeting minutes are published on Wednesday. Given the dovish tone of the statement accompanying July’s decision, these minutes are likely to include a different overall assessment. They may also allude to specific policy measures expected next month, which may include elements that surprise markets. We will also watch for any shift in individual members’ stances, trying to gauge any overall adjustment to the Committee’s reaction function. Coupled with a weaker than consensus outlook for June retail sales (Thursday), this should help UK bond markets outperform in the latter half of the week. However, we also forecast inflation reaching 3.1% in June in the coming week. This would require the new Governor to write an explanatory letter to the Chancellor. The Bank’s new remit has greater flexibility around its inflation target. So this rise in inflation is likely to confuse, rather than constrain the policy outlook over the coming months
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