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ECONOMIC DATA ANALYSIS - FED WOBBLES ON GUIDANCE
ANALYSIS FRIDAY 20 SEPTEMBER 2013
FED WOBBLES ON GUIDANCE
• US data to
question Fed’s tapering decision; focus shifts to fiscal debate
Election outcome hangs on FDP, but short-term outlook for euro policy unchanged
statement due - over the coming years, the FPC may prove more activist than the
New Fed uncertainty to reverberate ...This
week’s FOMC decision to eschew tapering and continue the $85bn/month pace of QE
was a surprise. The ensuing press conference saw the Fed Chairman soften the
Fed ’s commitment to its forward guidance. As such, the current pace of
economic expansion has grown in importance. The coming week sees US releases
that should help shape future tapering expectations. European attention will
focus on the German Election, although market reaction should be limited.
Domestically, the FPC statement will be the focus.
Economic data to shape taper
debate?... The Fed’s
decision not to taper QE was likely driven by a number of factors, including
the sharp rise in market rates. However, an apparent softening in economic
momentum recently is also likely to have played a role. The coming week sees
several economic releases which will be interesting, particularly in light of
this week’s surge in the Philadelphia Fed survey and existing home sales. Specifically,
durable goods orders look set to rebound after July’s drop; Q2 GDP looks likely
to be revised higher to 2.7%; and pending and new home sales releases are also
due. The Fed’s latest statement reduced confidence in its forward guidance and
suggested a more dovish bias.
There is now
a good chance that tapering does not occur until 2014. However, Bernanke suggested
no preset course and stronger data could yet see a decision to taper in
Shutdown ? ... US political uncertainty is returning
to the fore. Two key fiscal debates loom with agreement on a Budget required
over the next two weeks to avoid a shutdown of the Federal government. With
Democrats and Republicans still fiercely opposed, a compromise appears a long
way off. While agreement should prevail, the risk of prolonged political
deadlock is high. This augurs poorly for the debt ceiling debate to follow, with current estimates suggesting the Federal government
will run out of money towards the end of October/early November. Previous episodes
of deadlock on fiscal matters
have had a significant impact on
market, consumer and small business sentiment. This may have added to
the Fed’s recent caution.
reaction to German election? ...
Away from the immediate economic outlook, the euro
area will focus on the results of the German Election on Sunday. While several
scenarios are possible, the key uncertainty is whether the FDP will achieve the
5% threshold necessary to enter Parliament (latest polls suggest they will). In
all likelihood this will determine the shape of the next coalition, although
Merkel will probably remain Chancellor under either outcome. This will have
wider ramifications for Germany, but market reaction may be governed by the implications
for the European debate. We do not expect a marked shift in German policy
towards Europe. Accordingly, the performance of the AfD - anti-euro - party may
be the most interesting, not just for coalition arithmetic, but in gauging popular
resistance to Germany assuming a greater role in solving the euro areas
FPC, not MPC, the
focus for policy activity ... MPC members
Bean and Tucker speak over the coming week. Recent comments from Miles and Weale
have done little to question markets’ more elevated interest rate expectations.
However, given the MPC’s forward guidance commitments, the FPC may become the
more active policy body over the next two years. Wednesday’s statement (from
this week’s meeting) will be interesting. While the MPC dismissed current
concerns about the housing market, we expect it to have been a key topic of
discussion for the FPC and one that will merit close ongoing surveillance.
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