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ECONOMIC DATA ANALYSIS - MARKETS AWAIT FURTHER MACROPRUDENTIAL POLICY MEASURES
ANALYSIS FRIDAY 20 JUNE 2014
AWAIT FURTHER MACROPRUDENTIAL POLICY MEASURES
- Financial Stability
Report watched for new macroprudential policy measures
- US Q1 GDP to be
revised down further but more positive signs for Q2
- Euro area
‘flash’ PMIs to signal modest output growth in Q2
Varying speeds of
policy withdrawal... Over the past week, communication from both the Federal Reserve
and the Bank of England (BoE) has highlighted the divergent paths that the
respective central banks have taken in managing interest rate expectations.
Although the Fed continued to taper its asset purchases, comments from Fed
Chair Yellen, and the updated set of economic projections, painted a rather
cautious assessment over the economic outlook, with US GDP growth this year
revised down to 2.1-2.3% from 2.8-3.0%, echoing a similar downgrade by the IMF.
In contrast, the BoE sought to raise expectations that the first hike in interest
rates could come sooner than markets expected.
watched for FPC actions... While the BoE remains alert to the
danger that persistently low levels of Bank Rate may have on financial
imbalances, expectations are high that they may first utilise further
macroprudential tools to mitigate such risks, especially in the housing market.
Following the past week’s Financial Policy Committee (FPC) meeting, the coming
week’s Financial Stability Report (FSR) and press conference (Thurs) are
expected to be accompanied by new recommendations made by the FPC (see back
page). However, with Governor Carney noting that macroprudential policy is not
a substitute for monetary policy, any measures announced may fail to temper
market rate expectations.
Domestic data flow to remain buoyant...
Data over the coming week may also do little to temper interest rate
expectations. Recent revisions to construction output in the first quarter
suggest the final estimate of Q1 GDP (Fri) will be revised higher to 0.9% from
0.8%. With the focus turning to the outlook for Q2, the Lloyds Bank Business
Confidence Barometer (Fri) should provide further insight. So far, the survey,
along with the official PMIs, suggests that Q2 GDP growth set to match its
robust Q1 pace.
grows... Revisions to the Fed’s economic projections illustrate the
uncertain state of the economy. The growth forecast for 2014 was revised
down sharply in response to the unexpected fall in Q1 GDP. However, the unemployment
rate forecast was also revised down. Fed Chair Yellen used the word
“uncertainty” several times during her post-meeting press conference and there
seems to be more than a little confusion over what to make of recent data.
Given disappointing Q1 GDP growth, the Fed seems unsure what to make of the
fall in unemployment, whether it represents a genuine reduction or a pool of
discouraged workers likely to re-enter the workforce if growth picks up. Given
this, the Fed is clearly inclined to proceed cautiously. However, it will be
watching closely for signs that a tightening labour market is signalling a
problem. Chair Yellen was fairly dismissive of the recent rebound in inflation,
saying that too much should not be read into ”noisy” data. However, if it
persists, and in particular if there are signs of wages picking up, ‘forward
guidance’ from the Fed may become more hawkish in the future.
US data watched for Q2 rebound... Amongst
this week’s data, Q1 GDP (Weds) is expected to be revised down to show an even
bigger fall. However, markets will probably regard this as old news and will be
more interested in Q2 trends. These should be generally positive. Housing is an
area of downside concern, but May existing sales (Mon) and new home sales
(Tues), are expected to show some improvement. May durable goods orders (Wed)
are expected to fall modestly, but underlying orders should show a further
pick-up in demand. Meanwhile, the Fed’s preferred inflation measure, the
consumer expenditure deflator, is likely to have accelerated to a 1.8% gain in
Euro area trudges on...
The coming week will see June ‘flash’ PMIs for the euro area (Mon) and the
German IFO (Tues). Improvements in both are expected, however, this would still
only be consistent with modest growth, with Q2 GDP growth likely to be similar
to the 0.2% recorded in Q1
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