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ECONOMIC DATA ANALYSIS - IS THE FED ABOUT TO TAPER?
ANALYSIS FRIDAY 13 DECEMBER 2013
IS THE FED ABOUT TO TAPER?
decision to taper finely balanced
• Euro area
progresses on banking union, but growth remains sluggish
• UK data
rush to confirm robust growth and easing inflation pressures
Focus on Fed in last full week of year ... With the House of Representatives
having passed a US budget deal this week, the focus for the coming week is
squarely on the Federal Reserve’s announcement on Wednesday. Its decision whether
to taper its QE operations looks finely balanced. Elsewhere, the schedule for
economic data is heavy, particularly in the UK. In the euro area, EU leaders
meet to try to conclude key resolutions for the banking union.
Could tapering come early ? .. The passing of the US budget deal
removes one of the largest remaining hurdles preventing the Fed from beginning
to wind down its QE. Admittedly, the deal also needs to pass a Senate vote, but
this should be a formality. With economic news having improved in recent
months, momentum is building for tapering. However, whether the Fed begins on
Wednesday is a close call. The fact that the Fed has given no steer to markets probably
reflects the FOMC’s own indecision. The week sees some outstanding data to help
shape views, including the Empire State manufacturing survey, industrial
output, CPI inflation and housing updates all due before the Fed announcement. Yet
these are unlikely to prove pivotal. The Fed has to weigh whether the
improvement in the economy has been sufficient to justify tapering and if
markets are prepared for it - particularly as trading volumes fall before
Christmas. With inflation still low and Yellen due to take the helm in
February, there is every chance that it defers the decision to next year.
Euro area continues to make slow
progress ... Building
on the progress of this week’s Ecofin meeting, the coming week sees European
leaders gather again to take forward proposals for the Single Resolution
Mechanism. The pillars of the euro area’s banking union are coming together slowly,
but next year’s thorough review of the banking system, ahead of the ECB
assuming supervisory responsibilities, adds some risks to the outlook. The
coming week also sees ‘flash’ estimates of PMIs and important national surveys.
A further softening may raise concerns about euro area stagnation early next
UK closes the year with a flourish ... A rush of UK releases in the
coming week should add to the benign view that growth continues and inflation is
falling. CPI inflation is likely to stay at 2.2% in November and recent energy
price announcements should mean any rebound next month will prove short lived.
We see inflation easing below target in 2014. We forecast the unemployment rate
to fall to 7.5% on Wednesday, below consensus. This looks set to continue into
speculation that rates could rise ahead of the current mid-2015 expectation.
Next week’s MPC minutes, however, are likely to continue to make the case for a
prolonged period of very accommodative policy. Finally, Q3’s GDP is unlikely to
be revised (risks to the upside), but we will watch for details on the
household sector, which is likely to prove the key determinant of growth next
year. Q3’s current account deficit is likely to raise concerns about the
unbalanced nature of the recovery.
Downside risks for Asia in 2014 ? ... Japan’s Q4 Tankan survey and
China’s ‘flash’ PMIs over the coming week will add little to the longer-term outlook.
We see both economies slowing marginally next year from 2013’s pace, but both face
downside risks. In Japan the impending sales tax increase will be somewhat
offset by other fiscal easing - detailed in this week’s supplementary Budget -
but uncertainties remain. In China, attempts to manage the longer-term deceleration
in GDP growth through structural reform also present risks to the near-term
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