Federal Reserve Tapering to U.K. Inflation: Global Economy
The data docket in the U.S. this week will be eclipsed by the Federal Reserve meeting as prospects mount that policy makers will trim stimulus in response to an improving economy. Elsewhere, November price data out of the U.K. will probably show inflation is cooling toward the Bank of England’s target, German companies gained confidence in December and inflation in Brazil picked up through the middle of this month.
-- Chairman Ben S. Bernanke and his colleagues at the Fed, meeting for the final time this year, will have in hand recent reports that indicated more Americans are finding work and consumer spending is perking up. Odds of a faster start to tapering have indeed climbed. A Dec. 6 survey by Bloomberg showed 34 percent of economists said the Fed will begin reducing $85 billion in monthly bond purchases, consisting of $45 billion in Treasuries and $40 billion in mortgage-backed securities, at the Dec. 17-18 meeting. That compares with a Nov. 8 survey that showed 17 percent forecast a slower pace of purchases.
-- “Recent data on employment, retail sales and business inventories increase the likelihood that policy makers will announce their intentions to begin tapering asset purchases,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc., said in a note to clients. He said policy makers got “cold feet” in September, partly due to a loss of momentum in the labor market, a “potential stumble” in housing and a “potentially disruptive” government shutdown. “Since September, there has been significant improvement with respect to each of these factors.”
-- “We agree that the odds of a quicker start to tapering have risen, but still expect the Fed to wait until 1Q 2014 to begin to scale back their asset purchase pace,” Michael Hanson, U.S. senior economist at Bank of America Corp. in New York, said in a research note. “Despite the good news, we believe the option value of waiting remains high; growth has disappointed Fed expectations and has yet to be steadily above trend, while inflation continues to surprise to the downside and is drifting away from the Fed’s longer-term target.” He put the odds of a December taper at 25 percent, 30 percent in January and 35 percent in March.
-- Bank of England Governor Mark Carney may be about to get an early Christmas present. Philip Shaw, an economist at Investec in London, forecasts that data on Dec. 17 may show inflation slowed to 2 percent last month, which would be the first time in four years that it’s hit the BOE’s target. The median estimate in a Bloomberg survey of 36 economists is for inflation to hold at 2.2 percent. The range in the survey is from 2 percent to 2.4 percent, with two other economists sharing Shaw’s projection.
-- “We expect consumer price inflation to hover in a 2-2.5 percent range over the coming months,” said Howard Archer, an economist at IHS Global Insight in London. “Given the amount of slack in the economy and consumers’ limited purchasing power, we doubt that underlying price pressures will pick up markedly despite the economy’s improved performance.”
-- Unemployment (UKUEILOR) held at 7.6 percent in the three months through October, according to the median estimate in a Bloomberg survey before a Dec. 18 report from the Office for National Statistics. The three-month ILO jobless rate has been in the spotlight since August, when Carney tied it to his forward guidance on interest rates and said no tightening until 7 percent -- and maybe not even then.
-- “There’s a strong chance of the rate falling further to 7.5 percent in October, moving closer to the Bank of England’s policy threshold,” Chris Williamson, economist at Markit Economics, wrote in a research note. “We expect pay growth to start edging higher, alongside the tightening labor market.”
GROWTH IN THE U.K.
-- Britain’s economic growth accelerated to 0.8 percent in the third quarter, the fastest in three years, figures showed last month. An update on Dec. 20 may show growth was even faster -- 0.9 percent -- after Britain’s statistics office revised up its estimate for construction output on Dec. 13. The office said the change would, all things being equal, add 0.1 percentage point to GDP.
GERMAN BUSINESS CONFIDENCE
-- German business confidence probably rose in December to the highest in more than 1 1/2 years, according to economists in a Bloomberg survey before a report from the Munich-based Ifo institute on Dec. 18. While factory orders and industrial production data suggest Germany’s economy was off to a weak start in the fourth quarter, sentiment indicators signal the recovery in Europe’s largest economy will continue, according to Christian Lips, an economist at NordLB in Hanover.
-- “Such data are available earlier and don’t only provide a more timely assessment of the current economic state but also of the closer future,” said Lips, who is holding to his 2014 growth forecast of 2 percent.
-- The national statistics agency’s Dec. 19 IPCA-15 report may show that consumer prices in the month through mid-December rose 0.64 percent, the fastest inflation in 10 months.
-- The price increases for services and non-tradable goods won’t ease as needed to allow the central bank to reduce the pace of interest-rate increases, said John Welch, a macro strategist at Canadian Imperial Bank of Commerce in Toronto. He expects the figures to reinforce bets the central bank will increase the benchmark interest rate in January to 10.5 percent from 10 percent. “They still haven’t gotten to an inflection point” in the monetary policy cycle, he said by phone. “Underlying dynamics of inflation are still not all that great.”
--“Mid-month IPCA will probably be higher than in November, because a lot of price increases happen at the end of the year, especially travel and airplane tickets,” Andre Perfeito, chief economist at Gradual Investimentos, said by phone from Sao Paulo.
-- Japan’s large manufacturers probably grew more confident in the fourth quarter, according to estimates ahead of the Tankan business survey scheduled for release Dec. 16.
-- “The yen has weakened from an average of around 99 versus the dollar during the previous survey period to an average of about 101 for the latest survey period,” Kyohei Morita, chief Japan economist at Barclays Plc in Tokyo, said in a research report. “In this context, we expect sentiment to improve especially in manufactured goods industries heavily dependent on exports.”
AUSTRALIAN ECONOMIC FORECAST
-- In Australia, the government is due to release its Midyear Economic Forecasts on Dec. 17 that will show a budget deficit 45 percent larger than in August, according to a Bloomberg survey.
-- “This is still unlikely to be an imminent issue for the AAA credit rating,” said George Tharenou, a senior economist in Sydney at UBS AG. “Given sub-trend GDP, there will likely be no fiscal tightening, so we still expect the Reserve Bank of Australia to stay on hold.”
-- The following day RBA Governor Glenn Stevens will testify before a parliamentary panel. Stevens signaled last week that a weaker local currency is preferable over lower interest rates to help spur the nation’s economy, saying the so-called Aussie’s natural level is probably below its current value.
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