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ECONOMIC DATA ANALYSIS - SIGNS OF GROWTH FEED RATE MARKET DOUBTS
ANALYSIS FRIDAY 16 AUGUST 2013
SIGNS OF GROWTH FEED RATE MARKET DOUBTS
• FOMC minutes watched as countdown to
• Euro area ‘flash’ PMIs suggest
recovery, but ongoing travails suggest a slow one
• UK GDP and public finances to record signs of
Thin markets exaggerate moves... It is unclear how much current
financial market pricing reflects fundamentals and how much it is being exaggerated
by thin market conditions - the latter is certainly playing some role. However,
markets have generally reflected firmer economic news. Equity markets have
risen, with both the S&P 500 and Euro 300 indices around all-time and
multiyear highs respectively. Bond yields have also risen further, with 10-year
rates in the US, Germany and UK at multi-year highs. The coming week is
unlikely to bring fresh direction, with little scheduled news. US FOMC minutes,
euro area ‘flash’ PMIs and UK GDP maintain some interest for key regions.
Meanwhile the Jackson Hole central bankers symposium will be a focus for markets
as key central banks’ control over the front end of their respective curves
Tapering beyond September? ... A quiet week for US releases
leaves the minutes of July’s FOMC meeting as the key US focus. These will be
scanned for further clues on the Federal Reserve’s tapering strategy. Markets
are now starting to debate by how much the Fed will taper in September
(consensus $15-20bn), rather than whether it will happen. But there is also uncertainty
regarding the outlook for tapering beyond September, assuming it is announced then.
In particular, we will watch for any signs that the Federal Reserve is mindful
of the debt ceiling issue that is due to flare up again just as Congress returns
after the summer.
Central banks see limit of
influence? ... The central bankers symposium
in Jackson Hole (Thursday and Friday) has provided an insight into policy
makers thinking in recent years (and a platform to signal future policy
intentions). This year policy makers may reflect on the limits of their
influence. Interest rate markets are responding to signs of improving economic activity
and casting aside varying degrees of ‘forward guidance’ from central banks. The
meeting in Wyoming may give them another opportunity to influence market
Euro area posts subdued recovery ... The euro area emerged from
recession in Q2, posting a 0.3% expansion. The coming week’s ‘flash’ PMI estimates
for August will help gauge whether this will be maintained. Our global team
looks for a further modest rise in August, which should be consistent with
continued expansion in Q3. But we think that the pace of growth is likely to
remain modest, both this year and next. Although the deferral of fiscal
tightening in several economies across the euro area should help lift growth
next year, corporate lending rates have barely eased over the last 18-months.
Coupled with ongoing uncertainty over broader issues of integration, such as
the banking union, this is likely to weigh on business investment and keep the
ongoing recovery subpar.
Broadening UK recovery... In the UK, the second estimate of
Q2 GDP is due on Friday. An upward revision to construction output looks
insufficient to raise the preliminary 0.6% GDP growth estimate, although it
adds some upside risk. The release will include the first estimates of the expenditure
components, which we expect to show positive contributions from net trade, investment
and household spending, illustrating that the recent pick up in activity has
been broadly based. The week also includes the latest update of the public
finances (for July) - these have started the financial year relatively strongly
and again appear to reflect the better fortunes of the wider economy. However,
both releases will keep interest rate markets wary of the need for a normalisation
of the rate outlook sooner than the Bank’s current guidance suggests
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