Macro Weekly: A surprising Fed

by: Han de Jong , Aline Schuiling , Peter de Bruin , Georgette Boele , Maritza Cabezas

Macro-Weekly-23-September-2013-A-surprising-Fed.pdf ()

Big Picture: The decision of the US Federal Reserve not to start tapering its bond purchases took markets by surprise. It raises some important questions, though despite all the excitement, we do not think all that much has changed. Indeed, tapering is not a matter of if, but of when. We now expect the Fed to start scaling back its asset purchase programmes during the December meeting.

Eurozone: The foreign sector reduced GDP growth at the start of the third quarter. Although we expect a pick-up in exports and industrial production in the next few months, the weak start to the third quarter is in line with our view that the economic recovery will take shape at a modest pace. Meanwhile, Germany’s ZEW jumped higher again, confirming that the country will continue to outperform the eurozone.

US: Data during the week continued to suggest that the economy will accelerate in coming months. Granted, the Empire State Manufacturing index slipped back slightly, but the Philly Fed index rose to the highest level since 2011, suggesting that the manufacturing sector is accelerating. Meanwhile, housing market data were in line with our view that the recent rise in interest rates has not taken too much wind out of the sails of the housing market recovery.

Asia: Asia’s markets responded positively to the delay of the Fed’s tapering. Shortly after, the Reserve Bank of India surprised markets with an unexpected hike of its key lending rate by 25bp to 7.5%, which is expected to help anchor inflation expectations even as the economy is struggling with weaker growth. Meanwhile, China’s September flash PMI shows that manufacturing activity continues to gain steam.