Macro Weekly – The blindfolded economist

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

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  • Big Picture: The adverse weather conditions in the US are making it impossible to interpret the US economic data. Being blindfolded like this is always unwelcome, but it now comes at a particularly inconvenient time as the data should be telling us whether the acceleration in growth that came through in the second half of last year can be maintained. Given our positive view of fundamentals, we expect economic data to bounce back strongly once weather settles into a more normal pattern.
  • Rates: Stronger than expected eurozone GDP growth has reduced the chances of ECB monetary easing in March. However, the inflation outlook will probably be the crucial factor in the decision on whether or not to ease monetary policy further. We expect inflation to continue to undershoot the price stability goal over coming years. Meanwhile, Fed Chair Yellen struck a relatively positive note in her monetary policy testimony. As such, she emphasised that a tapering of asset purchases would likely continue.
  • FX: Sterling outperformed other major currencies last week on the back of the less dovish BoE Inflation Report. Our end of March target of 0.82 in EUR/GBP was reached. The US dollar remained out of favour, because of weaker than expected US data, while the euro was resilient, as the stronger eurozone GDP data reduced ECB easing expectations. We expect a combination of recovering US data and ECB easing to drive the euro lower against the dollar. Meanwhile, emerging market currencies recovered further, as sentiment improved.