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ECONOMIC DATA ANALYSIS - FOMC ON TRACK TO END QE BUT GLOBAL HEADWINDS PERSIST
ANALYSIS FRIDAY 24 OCTOBER 2014
Friday 24 October 2014
ON TRACK TO END QE BUT GLOBAL HEADWINDS PERSIST
- ECB to deliver its
Comprehensive Assessment on Sunday
- FOMC to end QE but
leave forward guidance broadly unchanged
- Modest uptick in
euro area inflation to do little to ease slowdown fears
Market moves over the past week have reflected some signs of relief over the extent of the
slowdown in global growth following reasonably firm GDP data in both China and
the UK. The past week’s better-than-expected euro area PMIs also eased regional
recession fears. Equity markets reacted positively to these developments with
the S&P 500 and FTSE 100 up almost 5% and 2.5% respectively, on the week.
The official results of the ECB’s
Comprehensive Assessment (of the health of the region’s banks balance sheets)
are published on Sunday. These could well dominate market sentiment
over the coming days. The Comprehensive Assessment will include a risk
assessment, an Asset Quality Review (AQR) and a stress test. While individual
banks will have already been made aware of the findings, the public disclosure
represents the start of the two-week window, for institutions deemed to be
short of capital to put forward their capital raising plans.
Over the course of the week, the
focus is likely to shift back to the euro area economic outlook. The
October ‘flash’ euro area PMIs pointed to some stabilisation in several parts
of the region, in particular Germany. However, forward-looking components of
the German PMIs and the ZEW survey suggest that sentiment remains fragile. This
concern could be exacerbated by the October German IFO (Mon.) which is forecast
to post a fifth consecutive decline, from 104.7 to 104.5.
With fears of outright euro area
deflation German state CPI data for October will be closely watched
on Thursday morning ahead of the official release in the afternoon and the euro
area preliminary CPI the next day. While an unchanged “core” rate and modest
uptick in the headline rate are likely to help the ECB justify keeping policy
unchanged for now, the prevailing weakness of growth and inflation raise the
distinct prospect of further stimulus (QE) over the coming months.
In contrast, the outlook for the US
remains more upbeat. Following the distortions to growth in the
first half of the year, the Q3 GDP release (Thurs.) will provide the first
‘clean’ reading of quarterly growth for 2014. We expect the economy grew at a
solid annualised pace of 3.0% in Q3. Ahead of this, September durable goods
orders (Tues.) are forecast to show some stabilisation following August’s steep
18.4% decline. Consumer confidence surveys from the Conference Board (Tues.)
and Uni. of Michigan (Fri.) are also expected to remain relatively upbeat,
while the Chicago PMI (Fri.) is predicted to drop back a little in October, but
remain at an elevated level.
The FOMC meeting is expected to
announce a reduction of $15bn in its monthly pace of bond purchases,
effectively bringing an end to their QE programme. While this is widely
expected, changes to the accompanying policy statement will attract significant
attention. The minutes of the September meeting noted most of the Committee
were concerned that a change in the ‘considerable time’ language would lead to
an unwanted tightening in financial conditions. Comments from various Fed officials
in recent weeks have done little to change this perception and we expect the
FOMC to make little change to its policy guidance at this meeting.
Elsewhere, it is a thin week for UK
data. Following the 0.7% q/q preliminary estimate for Q3 GDP,
attention will turn back to the prospects for Q4. Ahead of the guiding PMI
surveys for October, the release of our own Lloyds Bank Business Confidence
Barometer (Thurs.) will be watched for an early insight into the strength of
activity. Earlier in the week (Tues.) money supply, mortgage approvals and
consumer credit are also due.
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