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The Global Markets Weekly – 9/22/17
Fed Unwinding After Long Run, Eurozone Staying Limber
The well-telegraphed initiation of the balance sheet normalization program laid out in June will commence in October, as DE and most observers expected. Adjustments to the statement were minor, with risks to the outlook still roughly balanced and with continued emphasis on monitoring inflation developments closely. The transitory impacts of recent hurricanes on growth and inflation should be ignored, which leaves us more firmly on track for another measured rate hike in December.
Staying resolute in the face of near-term data wiggles should continue, particularly when paired with mild dovish nudges to the dot plot. Fed expectations are still well above market pricing in 2018 and 2019. Of course, the difference is not quite as wide as some make it out to be, as Yellen reiterated at the press conference, but directionally investors should be prepared for a gradual, cautious, but continued lift higher in short term rates. Longer rates haven’t followed for a variety of reasons—the 10yr yield is still below Fed estimates of a “neutral” short term rate in the 2.5%-3% range—anchored to an array of structural factors that continue to suggest limited prospects for rapid price inflation, a premium for safe assets, and one eye on the likely path of short rates ahead of, and in the wake of, the next inevitable slowdown.
Still, global factors have been at play as well, and investors should mind faster GDP growth in the Eurozone, spreading beyond the core to the periphery in 2017. Spanish growth has slowed marginally from the strong rebound in 2016 as a result of some moderation in housing, but continues to show solid growth this year on the back of rising exports. Growth has also accelerated in Italy and Portugal, and even Greece has started to show positive growth following several years of depression. Friday’s release of the IHS Markit Composite Eurozone PMI showing a robust jump in September to 56.7, a four-month high, suggests that the ongoing expansion has some legs. We will get more from the ECB’s Draghi on Monday.
German elections this Sunday should hold few surprises. Chancellor Merkel is expected to win a fourth term, but most likely with a reduced majority (Theresa May redux?) in the face of growing appeal of fringe parties on the right and the left according to latest polls. Opposition to mainstream parties would add some excitement to German politics, but the fringe parties even combined should not be expected to disrupt Merkel’s commitment to strengthen the European Union.
- S.: A number of first-tier reports including August personal income and spending (Fri), consumer confidence (Tue) and August durable goods (Wed), but at best these are placeholders before storm-impacted data flow. More important will be a barrage of Fed speakers, including Yellen (Wed), Dudley and Evans (Mon), Bostic (Tue), Bullard and Rosengren (both Wed).
- Eurozone: An array of economic and business sentiment readings (Thu) as well as September consumer prices (Fri), plus Draghi speech (Mon) in the wake of last week’s upbeat PMI figures. The stronger euro is causing some grumbling at the ECB, but an October decision on asset purchases will be difficult to delay.
- UK: Lending data (Tu/Fr) and an ongoing slowdown in house prices (Fri) are on the docket, along with revised Q2 real GDP.
- Japan: A wide array of updates on activity and prices, including the September manufacturing PMI (Mon), retail sales, housing starts, industrial production, labor market, and consumer prices (all Fri) figures.
- China: September PMI data (Fri/Sat) headline a lighter week.