Friday October 17, 2014 - 16:52:28 GMT
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ECONOMIC DATA ANALYSIS - CHINA GDP AND EURO AREA PMIS TO PROVIDE GLOBAL HEALTH CHECK
ANALYSIS FRIDAY 17 OCTOBER 2014
GDP AND EURO AREA PMIS TO PROVIDE GLOBAL HEALTH CHECK
- Recent market
volatility risks pushing back timing of first UK and US rate hikes
- China GDP and euro
area PMIs both set to soften, but only modestly
- Drop in oil price
to push US CPI to 1.5% - a six-month low
It remains to be seen whether recent
market volatility reflects a temporary shake-out of extended positions or a
worrying portend of more deep-rooted structural problems in the global economy.
While there have been plenty of headlines to hang the correction on -
geopolitics, ebola, falling oil prices, weak inflation and renewed tensions
across the euro area - the reality is that the hard economic data, especially
in the UK and the US, have not been especially bad. Given this, we are minded
to think that events over the past week represent a short-lived correction -
our internal risk appetite index suggests risk sentiment is ripe for a bounce
(see chart below). That said, we are conscious that such sharp market movements
can become more enduring if they lead to a self-reinforcing spiral in financial
and economic confidence.
the Bank of England is concerned. Latest comments from MPC member
and BoE Chief Economist Andy Haldane suggest he for one believes that recent
developments have taken a distinct turn for the worse. Other MPC members,
Cunliffe, Weale and Broadbent, are due to speak in the coming week. Their take
on recent events may signal a shift in MPC thinking. Similarly in the US, St
Louis Fed President Bullard suggested that, in light of recent developments,
the Fed should reconsider whether it is appropriate to end QE this month.
Until the dust
settles, we are sticking with our view that the first rate
UK hike could still occur in early 2015. Based purely on an assessment of
domestic fundamentals - not least the continued strength of the labour market -
this still seems a reasonable call. However, we fully recognise the risks and
stand ready to push back our view if upcoming global data and/or financial
market sentiment deteriorate further.
the week ahead, the key focus is likely to be on Q3 Chinese
GDP (Tues) as a broader barometer of global growth. We forecast a further
slowdown in the world’s second largest economy, to 7.3% y/y from 7.5% in
Q2. Anything more than this risks being viewed negatively by the markets.
the US, September CPI inflation (Weds) is likely to reinforce
disinflationary concerns. We expect the headline rate will have fallen to 1.5%
(consensus: 1.6%) from 1.7% in August, although the “core” rate (excluding food
and energy) is likely to be more stable. Otherwise it is a quiet week for US
data with only September existing and new home sales (Tues and Fri) likely to
attract much attention. These should provide a reassuring counterweight, with
both showing the housing market is continuing to recover.
the euro area, following the past week’s sharp fall in the German
ZEW, attention will shift to the region’s flash PMIs (Thurs) for October. Given
the intense interest in economic developments on the continent, arguably these
could prove the key releases of the week. We expect these to post a
general decline, with the euro area services and manufacturing indices
forecast to decline to 49.8 and 52.1 , respectively, with the risks to
both skewed to the downside. Watch out for a sub 50 reading for German
It is a big week for
UK news, with October MPC minutes (Weds), September retail
sales (Thurs) and Q3 GDP data (Fri). We expect the minutes to show a
continued 7-2 voting split against an immediate interest rate rise but, given
recent developments, this is likely to be regarded as ‘old news’.
Similarly, we suspect the market will view the Q3 GDP as somewhat dated.
Still, we expect these to have held up well, with growth over the quarter
forecast to have risen by 0.7% - which still represents above-trend growth. We
suspect retail sales, where we see upside risks, will attract most interest.
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