Friday November 20, 2015 - 17:42:18 GMT
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WEEK AHEAD: Economic Data Analysis
Friday 20 November 2015
UK CHANCELLOR FACES AUTUMN BLUES
UK Autumn Statement set to tackle fiscal slippage
Preliminary euro area PMIs expected to reaffirm soft Q4 activity
US Q3 GDP figures to reassure FOMC about US momentum
Chancellor to address mounting fiscal pressure, With today’s public finance numbers indicating further slippage from his 2015/16 fiscal target, George Osborne will use Wednesday’s Autumn Statement to spell out his plans to recover lost ground in order to meet his 2019/20 balanced budget objective. With his task further complicated by the House of Lords rejection of his proposals to curtail tax credits, it is likely that some of the required savings will be drawn from other areas of the welfare budget such as housing benefit. The Chancellor will also have to address easing global growth prospects which have also pressed on the domestic outlook. The preliminary estimate of Q3 GDP indicated that output growth slowed to 0.5%q/q from 0.7% in Q2 and subsequent industrial and construction output releases point to a repeat print when the second estimate is published on Friday. The release will include an expenditure breakdown, which will shed some light on the extent to which the expected slowdown was driven by weaker net trade.
ECB still on track to loosen policy at December meeting. Since President Draghi’s 22nd October announcement that an easing of monetary policy would be considered at the ECB’s December meeting, which is now less than two weeks away, indicators of euro area financial conditions have softened appreciably. For example, the trade-weighted euro has fallen by nearly 4%, the Euro Stoxx index has jumped by over 5% and 2-year government bond yields have declined to a record low. On top of these, the 5y5y inflation swap rate has extended its rebound since late September. However, we continue to anticipate that policy will be loosened next month for two reasons. First, the easing in market conditions largely reflects the ECB’s dovish signal and there is a risk of a sharp reversal if they do not follow through. Second, the economic data continue to suggest that the euro area recovery is waning. Combined with the possibility that the current spell of very weak inflation outturns could result in a de-anchoring of inflation expectations, this “dangerous cocktail” - in the words of ECB Chief Economist Peter Praet - could easily morph into a deflationary spiral. Some ECB council members are likely to argue for waiting while the impacts of the current QE programme feed into the real economy. However, we do not expect their case to be helped by the coming week’s releases which are dominated by sentiment surveys for November. For example, the preliminary euro area PMIs and the German IFO are set to indicate that the softening of activity seen in Q3 will linger into Q4.
FOMC looking beyond December rate hike? With market expectations of a December hike in the federal funds rate jumping sharply to around 70% following the October employment report, the minutes of the October 27-28 FOMC meeting were expected to be seen as old news. However, while the minutes supported the updated hike expectations, it was also notable that the Committee highlighted the likelihood of a gradual pace of tightening, suggesting a desire to shift market attention towards the longer-term path for interest rates. In the run-up to the 16th December decision the Committee will be looking for evidence that the solid pace of domestic momentum remains intact. The second estimate of Q3 GDP (Tue), which is forecast to be revised up to 2.0% (saar) from the 1.5% first estimate, should be reassuring. Meanwhile, those FOMC members who are particularly concerned about low inflation should have found some solace in the stronger-than-expected 0.2% y/y CPI print for October. The corresponding PCE deflator, which is the measure the Fed officially targets, so expected to firm to 0.3% y/y (Wed)
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