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ECONOMIC DATA ANALYSIS - TENSIONS IN UKRAINE CONTINUE TO DOMINATE SENTIMENT
ANALYSIS FRIDAY 14 MARCH 2014
TENSIONS IN UKRAINE CONTINUE TO DOMINATE
• A Crimean referendum on Sunday risks escalating
tensions and impacting energy markets
• Fed tapering policy on course, but possible
adjustment to forward guidance
• UK Budget to avoid pre-election hype, delivering
fiscally neutral, targeted measures
markets weigh on sentiment
... Financial markets are in a renewed risk-off phase, with bond yields and
equity markets falling. This resulted, in part, from more evidence of a softening
in Chinese activity. But more recently it has followed Ukrainian developments.
These look set to maintain the tone for the coming week, particularly with
Sunday’s planned referendum. The coming week also sees the latest FOMC meeting,
where forward guidance may change; the prospect of a rebound in US surveys; and
the UK Budget.
crisis reaches key stage... The
Ukrainian situation is delicately poised with a Crimean referendum planned for
Sunday. There has been precious little sign of the hoped for “de-escalation” to
date and EU officials have warned that a referendum could prompt further sanctions
from Western governments. In turn these risk Russian retaliation. Markets will
follow developments, but any signs of escalation may be most visible in crude
oil and other energy prices as well as further risk-off moves in markets.
to adjust guidance
... The coming week sees the FOMC’s latest policy meeting. We expect the Fed to
continue to taper its asset purchases by a further $10bn, taking QE down to
$55bn/ month. A number of Fed speakers have discussed the high threshold for
changing this path leaving any other outcome a major surprise. However, more
uncertainty surrounds the Fed’s guidance. With unemployment at 6.7%, the Fed’s promise
not to tighten policy before unemployment reaches 6.5% is close to expiry. The
Committee have publicly discussed possible next steps and we think there is a
good chance that Fed Chairwoman Yellen will use this month’s press conference
to set out the next stages. The Fed has a number of options, but we suspect that,
like the Bank of England, it will adopt more qualitative guidance and avoid another quantitative
target. Unlike the Bank, the Fed also publishes FOMC participants forecasts of
the policy rate. This will be a useful tool to reinforce any new forward
guidance message. Markets will also watch the publication of the first of
March’s surveys over the coming week. Extreme weather began to recede in March,
and these surveys could signal a rebound in activity.
Budget to avoid pre-election hype... Chancellor
Osborne presents his latest Budget on
Wednesday. With a General Election scheduled
for next May, this will be the last Budget
to meaningfully impact the economy before
then. However, we expect the Chancellor to dash any hopes of pre-election
stimulus. A recovery-inspired
improvement in the headline public
finances has done little to narrow a still
elevated structural deficit. The Chancellor has promised a Budget of “hard truths”. We expect a fiscally neutral Budget helping to
promote business investment and
end of UK forward guidance?
... Before the Budget, the UK releases labour market figures. We expect
employment growth to have slowed, but the unemployment rate is a closer call:
we expect the rate to fall to 7.1%, but see it on the cusp of 7.0%, which would
bring the first phase of the Bank’s guidance to a close (something we think
will happen next month). With Governor Carney and MPC member Weale revealing differences
in view this week, we will watch March’s MPC minutes for a fuller description
of any divergences in views on the Committee.
euro area inflation the only highlight... Markets will pay closer attention than usual to final estimates of Euro area inflation
on Monday. Otherwise the EU leaders’
summit should pass with little
attention outside potential developments
in the Ukraine.
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