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ECONOMIC DATA ANALYSIS - TAPERING DEBATE TO DOMINATE AHEAD OF FOMC MEETING
ANALYSIS FRIDAY 6 DECEMBER 2013
TAPERING DEBATE TO
DOMINATE AHEAD OF FOMC MEETING
• Bond yields rise as strong data increase chances
of near-term US tapering
• UK manufacturing, net trade and construction data
watched for signal on Q4 GDP
• EU Finance Ministers to meet amid rising pressure
to reach agreement on SRM
Bond yields rise on strong data... Today’s US employment
report has brought to an end a busy week that has included central bank policy meetings
in Europe, a UK mini-budget and key economic data in the US and UK. Overall,
the combination of these developments has left the pound a touch softer, the
FTSE 100 a little lower, but gilt yields up sharply, with the 10-yr benchmark
up by nearly 20bp at 2.95%. The rise in UK bond yields has partly been
motivated by ongoing signs of US economic strength (and the associated
possibility of December ‘tapering’), as well as firmer domestic data, with the
latest round of UK PMIs showing remarkable resilience.
A cyclical, not structural recovery... By contrast, the Autumn Statement had little market impact. Although
the OBR revised down its net public borrowing projection by £73bn over the next
five years, the drop was attributed to a cyclical economic recovery. As such,
the case for ongoing austerity remains in place. Still, the Chancellor made
much of the improvement in the UK’s economic fortunes. His claim, however, that
the UK was now the fastest growing of the developed economies proved
short-lived, with an upward revision to US Q3 GDP (to 0.9%q/q) on Thursday afternoon
putting the US in pole position.
US tapering fears escalate... Over the coming week
the economic calendar quietens down a little, before the following week’s key
pre- Christmas event: the US FOMC meeting. After the recent batch of strong US
data - GDP, ISM and this afternoon’s November payroll - there remains a clear
possibility that the Fed could still pull the trigger on tapering before the
end of the year. The coming week’s November retail sales and PPI figures are
somewhat secondary. Still, they will add a bit more colour to the debate. We
look for total retail sales to have posted a solid 0.7% gain last month, driven
mostly by a sharp rise in car sales (ex autos, sales are forecast to rise by 0.2%).
Meanwhile, the November PPI is expected to confirm that pipeline inflation
pressures remain minimal, with finished factory goods prices forecast to post a
third consecutive monthly fall (f’cast: -0.1%).
US Budget compromise in the offing?... From the Fed’s perspective, we doubt either of these releases
will have much of a bearing. Instead, progress on the US budget discussions is
likely to be more influential. The mood music surrounding US budget discussions
appears to have improved recently, with rumours of an impending compromise. If
realised, this would clear a major impediment to near-term Fed tapering as it
removes the chances of US government shutdown/US debt default in the new year.
UK ‘hard’ data watched for Q4 GDP signal... In the UK, only the October industrial
production, visible trade and construction output figures are due. Still, these
‘hard’ data will be watched for whether they confirm or conflict with the
strength of the earlier forward-looking surveys. Overall, we expect a mixed
bag, with industrial production forecast to soften, but net trade and
construction output to post an improvement. From a policy perspective, sterling
markets wil l also be watching BoE Governor Carney’s speech at the Economic
Club of New York on Monday. He is highly unlikely, however, to deviate from the
established party line.
ECOFIN deadline approaching... In the euro area, the
focus will be on the EU Finance Ministers’ meeting (ECOFIN). The importance of
this month’s meeting has been elevated given the self-imposed deadline to
achieve some meaningful progress on the Single Resolution Mechanism (SRM) - or
Banking Union - by the end of the year. Failure to do so would highlight the
continuing political challenges to a solution to the euro area crisis.
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