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ECONOMIC DATA ANALYSIS - MUCH TO WRAP UP IN FINAL WEEKS OF YEAR
ANALYSIS FRIDAY 29 NOVEMBER 2013
MUCH TO WRAP UP IN FINAL
WEEKS OF YEAR
• Payrolls could keep markets guessing over December
• Autumn Statement allows Chancellor to deliver good
news, MPC on hold
• ECB forecasts 2015 outlook, arguments for further
policy easing to roll into 2014
A busy end to the
year... As December approaches,
markets’ natural inclination to wind down to year-end could well be interrupted
by some key events. While an important FOMC meeting and the US Budget committee
report are due later in the month, the coming week sees the UK Autumn Statement
and MPC announcement, the ECB announcement and a US employment report that
could prove critical to the timing of the US tapering debate. As volumes thin,
this could lead to some volatile reactions.
Markets wary of
strong US payrolls... As well as the
latest monthly barometers of US activity in the ISM indices, the coming week
sees November’s payrolls report. This will be the last employment report before
the next Fed policy meeting on 18 December. We forecast a 175kmrise in payrolls
this month, softer than October’s 204k and below consensus. However,
uncertainty surrounds the release and markets would likely view a third 200k+
rise in four months as evidence that the labour market has improved
sufficiently for the Fed to announce tapering in December. The unemployment
rate only inched higher in October to 7.3%, despite 700k ‘furloughed’ workers
bolstering the numbers, which will reverse this month. We forecast unemployment
staying at 7.3%, but a fall is possible and could add to concerns of a
good news ... Domestically, the
Autumn Statement provides the Chancellor with his first opportunity to deliver
good fiscal news. The economy has grown more quickly than the OBR forecast in
March and an upgrade to its growth projections should be consistent with a £90bn
lowering of the projected borrowing profile. The Chancellor is likely to
introduce some policies to ease the ‘cost of living’ squeeze faced by households.
However, a persistent structural deficit is likely to constrain policy to fiscal
neutrality overall. This leaves the outlook for an increasingly tighter fiscal
stance over the next few years.
MPC lets FPC fire
first shots... The MPC also
meet this week, announcing its decision on Thursday after the Autumn Statement.
There is little chance of a policy change. With unemployment in excess of 7%,
the Bank’s commitment to no change will likely prevail. Moreover, this week’s Financial
Stability Report (FSR) included measures to guard against excessive imbalances developing
in the housing market. This was surprising only in that it happened earlier
than we expected. The FPC hopes that small measures now may prevent larger
implications later. From a monetary policy perspective, tighter macroprudential
policy should delay the need for tighter monetary policy. The FPC minutes published
in the coming week will add further detail. Markets will take their cue from
PMI reports, which we expect to soften.
ECB, time for
reflection... The ECB
announces its latest policy decision on Thursday. The euro area recovery
remains fragile and although this week’s rebound in inflation should have eased
fears of deflation, a stagnant economy and large output gap suggest the need
for looser policy. Reports abound of further imminent easing by the ECB - even
after last month’s refi rate cut. We have sympathy with this view, but do not
expect any change this month. Another LTRO appears the most likely next move.
But banks may be wary of taking this up ahead of the end of this year. Moreover,
we believe the prospects of other measures, such as a deposit rate cut or asset
purchases, remain distant barring a significant deterioration in conditions.
Accordingly, this meeting may focus on new economic projections and ongoing
efforts, including the first sight of 2015 forecasts and further detail on the comprehensive
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