Big Picture: We think that economic fundamentals in the US have strengthened for some time, and continue to think that the business cycle will pick up during the next couple of quarters. Still, one cannot be altogether confident as one does not know to what extent the data has been affected by the shutdown. We think that the Fed faces the same uncertainty, and as a result a December tapering seems highly unlikely to us.
US: We have therefore pushed our first tapering call to March next year. This also has implications to our interest rate forecasts. We now see 10-Y Treasury yields at 2.75% year end, instead of 3.0% previously. However, we still think that the recovery will strengthen and that the Fed will hike in the first quarter of 2015. As such, we continue to expect that Treasury yields will rise next year.
Eurozone: The eurozone’s composite PMI declined in October due to a fall in the services sector activity index. At its current level, the composite PMI is consistent with modest GDP growth in the final quarter of the year.Meanwhile, we have also lowered our forecast for 10-Y yields a touch.
Dollar: The market’s expectation of a later Fed tapering has also weighed on the USD, as it made the currency a less attractive currency to invest in. Meanwhile, the fiscal discussions could well resurface again, hurting the dollar. We therefore has raised our year-end EUR/USD forecast from 1.28 to 1.35. That said, we continue to believe that the dollar will strengthen significantly next year.