Macro Weekly: Upward revisions … at last

by: Han de Jong , Nick Kounis , Georgette Boele , Roy Teo

Macro Weekly - 9 December 2013 - Upward revisions ... at last ()
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  • Big Picture: It has required a significant amount of patience, but upward revisions to growth forecasts have, finally, arrived. Last week, the ECB, the Bundesbank and the UK’s OBR raised 2014 GDP growth forecasts. When economists stop revising their growth forecasts downwards and, instead, start raising them, this is a good indication of a cyclical turning point. Last week’s economic data were also consistent with the idea that global economic growth is accelerating, led by the US. Indeed, the nonfarm payrolls signalled that the improvement in labour market conditions is continuing and strengthening.
  • Interest rates: The ECB left policy unchanged, even though it forecasts inflation will be well-below its goal over the next two years. We think that the risks to even these low inflation forecasts are tilted to the downside, so further easing in coming months remains a distinct possibility. QE-light – in the form of ending the sterilisation of the SMP – could be a low threshold first step. In the US, strong labour market data increased the chances that the Fed will start to taper soon. At the same time, Treasuries seem to have digested the idea, suggesting limited further near term upward potential for yields, though further rises look likely during the course of next year.
  • FX: Last week’s better-than-expected US data pushed up US Treasury yields. Initially this resulted in some nervousness in currency markets pushing safe haven currencies higher and emerging market currencies lower. But the mood changed after the strong US employment report as investors focused on the positives for the economy and appeared to have digested the idea of Fed tapering. The Japanese yen dropped on improved investor sentiment. Meanwhile, the inaction of the ECB and its less-dovish communication compared to expectations, resulted in a stronger euro.