Macro Weekly – A touch of grey

by: Han de Jong , Nick Kounis

Big Picture: Economic data has generally been very encouraging recently but last week’s data – certainly in the US – was more mixed. Nevertheless, we remain convinced that the global economy is in the process of an acceleration of growth and that the next six quarters will produce much better data than the previous six, as the arguments why that should happen remain compelling.

Eurozone: The economy came out of recession in Q2 and is set for a gradual recovery, helped by a sharp slowing in the pace of austerity, an acceleration in global demand growth and a sustained easing of uncertainty and financial stress. Consequently, the ECB faces a challenge to dampen rate hike expectations.

US: Financial markets moved to price in a bigger probability of a September taper following strong initial jobless claims and stabilising inflation. We think the FOMC will indeed start to reduce the pace of its asset purchases next month. Nevertheless, the Fed will also likely step in verbally and try to rein in Treasury yields if they rise too much and too fast, because the last thing it wants is an early, sharp tightening of financial conditions.

Asia: The Indian authorities introduced a number of measures in an attempt to support the currency last week. In addition to another hike in the import duties of gold, the Finance Minister committed himself to reducing the current account deficit. More convincing structural measures are needed to improve confidence.