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Macro Week Ahead - Bernanke before a difficult exercise

Macro Week Ahead - Bernanke before a difficult exercise

17.6.2013 10:18

Today, the eco calendar contains the US Empire State Manufacturing index and NAHB housing market index, while the euro zone trade balance will be less interesting for markets. The G8 Summit in Northern Ireland will start and ECB’s Mersch and Weidmann are scheduled to speak.

In May, the NAHB housing market index improved for the first time in four months. The headline index rose from 41 to 44 and a further, albeit limited increase is expected for June. The consensus is looking for a pick up to 45. It will be interesting to see whether the recent increase in interest rates has already an (negative) impact on housing market sentiment. The Empire State manufacturing index fell back into negative territory in May, as did the overall manufacturing ISM. It will be interesting to see whether there are signs of improvement in June. The consensus is looking for a limited uptick from -1.43 to 0. We hope to see a slightly stronger figure, supported by hopes that the impact of the sequester is starting to fade. Nevertheless, activity will probably remain lacklustre.

Looking to the eco calendar further out this week, there are interesting releases in both the US and EMU. In the US, the Philly Fed survey will give timely info about the cyclical manufacturing sector that is in a weak spot. Today’s NY survey may gives us already clues about the recent development. The national ISM dropped in May below 50. Regarding the housing data, besides today’s NAHB, we expect starts & permits tomorrow and Existing Home sales on Thursday. They will tell us whether the housing recovery continues (which we expect). Finally, the initial claims fell unexpectedly last week and are at cyclical low levels. Another decline would suggest that the labour market is strengthening again. For the EMU, we retain the advance PMI’s (Thursday). Contrary to the US, the PMI’s rose in May, but they are still below 50 mark. Market expects a marginal improvement in June, but it would still keep the indices below 50. The ZEW sentiment survey and car registrations on Tuesday are interesting too, the former might give clues about the PMI’s, even if correlations are not very strong. The latter might show us whether consumers become more confident in the future and start buying big ticket items. In April. Car sales were again positive in Y/Y comparison, the first time since the fall of 2011.

The 2-day FOMC meeting starts tomorrow and finishes on Wednesday. Besides the usual FOMC statement, also the new economic projections will be published and chairman Bernanke will hold a press conference. It is likely that the FOMC will discuss its exit policy. It is possible that we will see the results of this discussion only during his semi-annual testimony to Congress or that we need to read the conclusions in the Minutes. Compared to the exit strategy unveiled in June 2011, the Fed may indicate that it won’t sell its assets, but simply led them mature. Another point of discussion is the role the Fed funds will play in the context of excess liquidity. It might be that the Fed funds will lose its traditional signal function and another rate like the interest on excess reserves will get that function. Most attention will go to the fate of the asset purchase programme. Bernanke suggested on May 22 that the Fed may start tapering the programme at the next few meetings on the condition the economic outlook, more specifically if the outlook for the labour market, has improved substantially in the context of price stability. We don’t expect the Fed to decide that this condition is fulfilled now. The Fed needs more time to see the effects of the fiscal measures on growth and the labour markets. On top of it, recently some governors showed concern about too low inflation. The Fed started QE-2 because of too low inflation, which suggests that this element may also play a role in the decision.

NY Fed Dudley suggested that it may take 3, 4 months before the outlook for the labour market and inflation are clearer, which points to the September meeting (our favourite timing for the start of the tapering) at which a decision may be taken. However, Bernanke will need this time frame to prepare markets for a change in policy. So, we expect Bernanke to repeat that a tapering of asset purchases may be introduced in the next meetings, but depending on the data that will be released. Bernanke will also emphasize that after the asset purchase programme is finished, rates will remain unchanged for a considerable time. It will be a challenge for Bernanke to continue preparing markets for a reduction first and later on an end of the asset purchases, while on the other hand stressing that this doesn’t mean a tightening of policy, only a slowing of the pace of easing (and later on a neutral stance). Recent sharp increase in yields and moves in other markets show that navigating markets through a gradual change in policy is a delicate exercise. We don’t expect Bernanke to be dovish and move markets away from the idea that a policy change may be approaching, but neither should he be hawkish, pretending that a change in policy is imminent.


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