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ECONOMIC DATA ANALYSIS - WILL DISINFLATION SWAY THE FED?
ANALYSIS FRIDAY 23 JANUARY 2015
WILL DISINFLATION SWAY THE FED?
- Euro focus shifts to
Greece amid strengthening support for Syriza
- FOMC rhetoric to hold
steady amid ongoing signs of disinflation
- UK economy to report
another quarter of above-trend growth
ECB bazooka boosts market sentiment, but further
questions lie ahead... The ECB’s announcement this week of a €1.1 trillion asset
purchase programme delivered a significant shot in the arm for market
sentiment. Furthermore, ECB President Draghi made it clear that the programme
could be extended should conditions warrant in order to bring inflation back to
target. This, coupled with lowered costs associated to future TLTRO programmes,
helped the rally in global equity markets continue. Whether the risk
sentiment can be maintained over the coming week will hinge upon the outcome of
the Greek elections and messaging from the Fed.
focus turns to Greece... Following the ECB’s decision, however, the
Greek elections present the next hurdle for risk sentiment as the Greek
electorate take to the polls to elect a new parliament on Sunday. According to
latest polls, the left-leaning Syriza party’s lead over the New Democracy party
has widened and outright support for the party has increased, raising the
likelihood that it emerges as the single largest party, forming either a minority
government or a coalition involving one of the smaller parties. We view the
latter as being the more likely outcome. As the outcome of the election may
cause frictions in Greece’s relationship with the rest of Europe, the exit
polls which are due to be published from 5pm GMT onwards on Sunday, will be
keenly awaited with market impact likely to be felt on Monday.
Bank spotlight shifts to the FOMC... Following the surprise shift
in the voting pattern at the Bank of England, the focus in the coming
week shifts to the outlook for US monetary policy. The minutes of the January
MPC meeting suggested that the Committee were now seemingly united in the need
to keep policy unchanged in the UK, as concerns over the prevailing weakness of
inflation formed the single biggest consideration for the MPC. In contrast, the
FOMC have hitherto been more minded to look through the ‘temporary’ softness in
headline inflation. In December, the FOMC moved away from the use of
“considerable time” in its policy rate guidance in favour of “(the fed) can be
patient in beginning to normalize the stance of monetary policy.”, providing a
clear signal of their intention to deliver the first rate hike in 2015. While
this view will have been strengthened by the subsequent upward revisions to Q3
GDP, the Committee’s assessment of the inflation outlook will be closely
watched in light of the continued decline in oil prices; the circa 6% rise in
the dollar index since the last meeting and the unexpected drop in December pay
growth. The Employment Cost index for Q4 will provide a cross-check on the
extent to which the softening in the pace of growth in Q4 average earnings is
reflected in overall labour costs.
US activity outlook
remains firm... Following the rapid pace of expansion in
Q3, US GDP growth is expected to have remained firm in the fourth quarter,
albeit at a more moderate pace. We expect the economy grew at a solid
annualised pace of 3.5% in Q4. Ahead of this, December durable goods orders (Tues.)
are forecast to show some stabilisation following September’s 0.9% decline.
Consumer confidence surveys from the Conference Board (Tues.) and Uni. of
Michigan (Fri.) are also expected to remain relatively upbeat, along with the
Chicago PMI (Fri.).
Domestic activity still
buoyant... Despite growing concerns over the inflation
outlook in the UK, the preliminary estimate of Q4 GDP (Tues.) is forecast to
report another quarter of above trend quarterly growth. Later in the week
(Fri.) money supply, mortgage approvals and consumer credit are also due.
Euro area inflation to
fall further... Following the ECB’s QE announcement, the
inflation outturns over the coming months remain of interest. In the near term,
the downtrend is likely to have continued. We forecast the preliminary release
of January euro area inflation (Fri.) to have recorded a second consecutive
month of negative inflation at -0.5% y/y from -0.2%. While in Germany the IFO
survey is forecast to have ticked up to 106.8 from 105.5 in light of the firm
reading from the ZEW survey earlier this week.
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