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ECONOMIC DATA ANALYSIS - UNSETTLED MARKETS POSE POLICY DILEMMA
ANALYSIS FRIDAY 23 AUGUST 2013
UNSETTLED MARKETS POSE POLICY DILEMMA
• Concerns of
‘Fed tapering’ prompt sharp sell-off in emerging markets
Carney watched for hints of more concrete stimulus
• Euro area
growth improves, but debate over Greek bail-out casts a shadow
Spotlight shines on the emerging markets... With little key data or events in the
advanced economies, the spotlight has been on the unfolding drama in emerging
markets over the past week. With the notable exception of China, where renewed
signs of economic stability have emerged, financial market volatility has
returned with a vengeance. Amid fears of US tapering, those emerging markets that
have relied heavily on global liquidity to finance large current account
deficits have been particularly hard hit. The most notable casualties have been
the INR, IDR and BRL, which fell to either record or new multi-years lows
against the US dollar over the past week.
FOMC minutes point to tapering announcement... US developments over the past week
have done nothing to dispel the notion that the Fed will soon start to taper
its bond purchases. The minutes of the July 31/ Aug 1 FOMC meeting - published
mid week - confirmed that Fed officials were ‘broadly comfortable’ with a plan
to start reducing its bond purchases later this year. Barring a major rout in
bond markets, we expect the Fed to formally signal its intention to start
‘tapering’ at its next FOMC meeting on Sept 17-18.
Chicago PMI to point to stronger Q3 US
growth... With the
exception of the Chicago PMI, the coming week’s US releases are mostly second
tier, including durable goods orders, Q2 GDP (2nd estimate), personal income
& spending, and Michigan consumer sentiment. The general tone of the data,
however, are likely to be firmer. We expect US GDP to be revised slightly
higher, from 1.7% to 2.2% (saar), while a further improvement in the Chicago
PMI should point to stronger US growth in Q3.
UK Q2 GDP revised higher... Closer to home, the past week
delivered some further positive economic news. Q2 GDP was revised higher, from
0.6%q/q to 0.7%q/q, supported by across the board improvements in consumer spending,
investment and net trade. The rise in investment spending is especially
welcome, and may provide an early sign that the investment cycle is finally
Carney watched for hints on QE... Looking to the coming week, the UK
data calendar remains fairly thin. Our in-house Business Barometer will shed
more light on the prospects for H2 growth. The latest money supply, personal
lending, mortgage approvals and consumer confidence figures are also due, although
we doubt these will prompt much of a market reaction. Instead, the most
important event will be Governor Carney’s speech in Nottingham on Wednesday.
Given the rise in money market rates and bond yields since the forward guidance
announcement, the markets will be watching for any sign that the MPC could
follow up with more concrete stimulus - including the possibility of more QE.
Euro area recovery gaining traction... The main focus in the euro area
will remain on emerging signs of recovery. Over the past week, German Q2 GDP
growth was confirmed at 0.7% in the second estimate, while the German ‘flash’
PMIs came in better than expected, posing an upside risk to the upcoming IfO
survey. Apart from the IfO, focus will also be on consumer confidence, unemployment
and CPI data in Germany, as well as CPI data for the euro area as a whole. Attention
on the German election on 22 September also looks set to build. Although Angela
Merkel is likely to take some solace from the improvement in economic
sentiment, the debate over a possible third Greek bailout risks casting a long
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