- We look for hints from Fed speakers on tapering as well as potential changes to forward guidance
- OECD downgrades forecasts but still expecting global economic recovery next year
- On the data front: Germany’s ZEW economic sentiment rose on lower interest-rate expectations
Fed speakers: watch out for the taper and potential sugar coating
After the calm start to the week with relatively small movements in financial markets, economic data releases and speeches by a number of FOMC members could well spice things up. Recently government bond markets have rallied on expectations that the Fed will not begin to taper its asset purchases this year and on the partly-related view that US official policy rates will remain on hold for longer. The big challenge for the Fed going forward will be to anchor those expectations when it starts to taper its asset purchases. As noted on these pages previously, we expect tapering to start in March, but we also expect the central bank to sugar the taper pill by lowering its unemployment threshold to signal that rates would nevertheless remain low for a long period. So it is important to look for signs in the FOMC members’ speeches not only of the timing of the taper but also of possible changes to forward guidance.
The FOMC line up and their (policy) orientation
So far we have seen relatively hawkish comments from Philadelphia Fed President Charles Plosser, who cast doubt on QE noting that “it is not practical to adjust the Fed’s pace of bond buying in response to changes in the economy because shifts cause confusion and the correct levels aren’t clear”. Mr Plosser is not currently a voter (but will become a voter in 2014) and is known to be an arch hawk, so his comments were largely ignored by financial markets. Next up is Federal Reserve Bank of New York President William Dudley (arch dove, voter), who is scheduled to speak on the economy at a briefing in New York and St. Louis Fed President James Bullard (dove, voter) who will speak on the economy and monetary policy. Moreover, the FOMC minutes will be released later today as well. On Thursday Jerome Powell (dove, voter), Richmond Fed President Jeffrey Lacker (hawk, non-voter), the Fed’s Bullard (again!) will speak on various topics ranging from financial regulation to monetary policy. On Friday Kansas City Fed President Esther George (hawk, voter) and Daniel Tarullo (neutral to dovish) also hit the wires.
OECD downgrades make the news
On Tuesday, the OECD released its updated global economic forecasts and its downgrades to its forecasts made headlines. We are more optimistic than the OECD on the economic outlook, but a closer look suggests the Paris-based organisation is far from gloomy. Its revisions seem to be largely related to disappointments in the past and it is still forecasting an acceleration in global growth (to 3.6% in 2014, 3.9% in 2015 from 2.7% this year).
German investor sentiment edged up helped by rate cut
Germany’s ZEW economic sentiment increased from 52.8 in October to 54.6 in November. The outcome was a touch higher than the consensus forecast. At its current level, the series is significantly higher than its long-term average value of around 25 and close to historically high levels, signalling that the German economy will probably gain momentum in the next few quarters after it grew by 0.3% qoq in Q3. This is in line with our forecasts for the German economy, which we expect to continue to outperform the eurozone during the rest of this year and in 2014. The details of the ZEW report reveal that the rise in sentiment was largely due to lower expectations for short and long-term interest rates in the US and the eurozone on the back of the ECB’s rate cut of early November and the expected postponement of Fed tapering. Germany’s export-orientated sectors (e.g. steel, mechanical engineering and automobile) all saw upgrades in sentiment, while sentiment in construction and retailing jumped higher as well. In contrast, sentiment on banks and insurance companies declined noticeably.