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ECONOMIC DATA ANALYSIS - SCOTLAND REFERENDUM DOMINATES IN A KEY WEEK FOR MARKETS
ANALYSIS FRIDAY 12 SEPTEMBER 2014
SCOTLAND REFERENDUM DOMINATES IN A KEY WEEK FOR MARKETS
uncertainty poses key event risk for sterling markets
to change its language on forward guidance
of ECB TLTRO watched as guide to stimulus success
Event risk steps up a gear in the coming week. The
Independence Referendum in Scotland (Thurs.) dominates what is otherwise also a
busy week for domestic data. Internationally, the focus will primarily be on
the US FOMC meeting (Weds.) and a key ECB liquidity operation (Thurs.). Both of
these also have the potential to be big market movers.
Independence Referendum... Remaining polls will be scrutinised
intensely, as market participants seek final guidance on how the result is
likely to break. Over the past week the swings in the polls have put
sterling under significant pressure. A further escalation in uncertainty either
ahead of, or in the wake of, the result would risk adding to volatility.
Polling stations are scheduled to close at 10pm on Thursday, with the results
of the 32 local authority areas reported overnight. Depending on how close the
result is, an indication of the outcome may be available in the early hours of
Friday, although an official declaration is not expected until later in the
data to play second fiddle... Ordinarily, the upcoming domestic
economic data could be expected to prompt a sizeable market reaction. Given the
referendum, however, they are likely to have less impact than usual.
Still, in the event of a no vote attention is likely to return quickly to the
economic data for clues on the policy outlook. On the dovish side, we
expect CPI inflation to have fallen back again in August. But balanced against
this, wage growth and retail sales are both forecast to have picked up, and the
unemployment rate is predicted to have dropped further. Furthermore, the
minutes of the September MPC meeting are likely to show that the two MPC
members (Weale and McCafferty) who dissented in favour of an immediate rate
rise in August did so again this month (see back page for more details of our
UK data forecasts).
change of language?... Elsewhere, the US FOMC meeting (Weds.)
provides the main international focus. Following recent comments from Fed
members, and broadly positive economic data, we believe there is a good chance
the FOMC will shift its language on forward guidance before its asset purchases
end next month. Currently, the Fed adopts a time-dependent guidance that states
the current level of interest rates will be maintained "for a considerable
time after the asset purchase programme ends". It is increasingly clear,
however, that this is causing divisions. As a result, we expect the Committee
to move from time to purely data- dependent guidance. If so, expect the US
dollar to appreciate further and US government bond yields to rise, especially
at the short end of the curve. (see FOMC Preview, 12 September 2014).
TLTRO take-up disappoint?... Market attention will also be on the
first tranche of the ECB’s Targeted LTRO programme (Thurs.), with the
second to follow in December. Despite the additional measures announced in
early September, the TLTRO remains a key part of the ECB’s plan for stimulating
the euro area economy. In all, up to €400bn of extra liquidity is set to
be offered to banks this year through this channel. The expectation is that the
first tranche will be around €175-225bn. Anything below €150bn is likely to be
viewed with disappointment by markets.
While the above events look set to dominate, upcoming international data will also
be watched. In the US, industrial production, housing market and CPI/PPI
inflation data due. Overall, we expect these to paint a picture of ongoing
economic recovery within the context of limited price pressures. In the euro
area, the German September ZEW survey (Tues.) is predicted to fall for the
ninth consecutive month. The final estimate of August euro area CPI inflation
is forecast to be unchanged at 0.3%.
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