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ECONOMIC DATA ANALYSIS - MARKETS VULNERABLE AS US FISCAL DEBACLE CONTINUES
ANALYSIS Friday 4 October 2013
VULNERABLE AS US FISCAL DEBACLE CONTINUES
• The ongoing US shutdown and Fed
tapering debate to dominate
• Firmer UK IP and net trade to boost
prospects for Q3 GDP; MPC on hold
• IMF due to release its flagship
World Economic Outlook on Tuesday
to follow shutdown?...
The surprise decision by the Fed not to start tapering is increasingly looking
like a good decision as politicians in Washington threaten to sour the economic
outlook or worse. The US Budget impasse looks set to drag on into the coming week
as House Republicans and Democrats tussle towards a resolution to end the government
shutdown. Although the direct economic impact of the shutdown should be relatively
limited, assuming it is brief, the standoff highlights the potential for a much
bigger hazard ahead - the federal debt-limit. Failure to raise the debt limit
later this month could potentially lead to a US default, the impact of which
would have serious domestic and global reverberations. While a compromise must ultimately
be reached, another eleventh hour nail-biter seems almost inevitable.
on Washington & FOMC minutes...
The postponement of the September labour market report, due for release today,
highlights the wider impact of the government shutdown. The shutdown could see
further data releases postponed, notably the coming week’s September retail
sales and August external trade, although market focus is likely to be centred
on Washington - on both Congress and the Fed. In particular, the minutes from
the Sept 17-18 FOMC meeting (Weds) are likely to draw the market's attention,
as will a host of Fed speakers.
dollar under pressure...
10yr treasury yields are currently hovering around 2.6%, 40bps below their
levels ahead of last month's labour market report and around 15 bps below
levels after the FOMC refrained from ‘tapering’ in September. The US dollar is
unloved, falling through key levels this week against the pound (1.62) and euro
(1.36), with emerging market currencies extending gains. The ‘tapering’ debate
has played a major part in the dollar's recent plight, and it is hard to see
how upcoming comments will bring forward expectations of its start. As a
result, the dollar could face further selling pressure.
on hold amid growing signs of recovery... In the UK, the underlying strength of economic data continues to show through, with
the PMI indices (Sept) this week all
modestly lower but Q3 averages
sharply up on Q2. The PMIs suggest Q3
GDP growth of around 1%. This has buoyed the
pound. However, led by external events, market
rate expectations have pared back in recent
weeks. Against this backdrop, we expect the
Monetary Policy Committee to leave policy
unchanged on Thursday. Recent comments from MPC members suggest no need for further stimulus and broad support for the forward guidance in place. If, as we expect, they follow last month’s
practice, an accompanying statement is
unlikely. On the data front, industrial output figures for August are expected to show a rebound and a narrower trade deficit is forecast - firming expectations of a strong Q3
GDP. The RICS housing survey will
also draw interest, particularly with
the start of the second phase of the ‘help to buy’ scheme brought forward to the coming week.
quieter week in Europe...
After this week’s dramatic events in Italy, the political backdrop should
simmer down in Europe. Exploratory talks between Merkel's CDU/CSU party and the
SPDare taking place today, with separate talks scheduled with the CDU/CSU and
the Greens over the coming days, as the next German governing coalition takes
shape. The data calendar is light, with German factory orders and industrial
production the highlights. We look for a solid rebound in both. ECB president
Draghi speaks in New York next Thursday.
Finally... The IMF will be publishing its
flagship World Economic Outlook (WEO) on Tuesday.
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