Macro Weekly – Yellen in the limelight

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

Macro Weekly - 10 February 2014 - Yellen in the limelight ()
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  • Big Picture: Last week’s set of economic indicators from around the globe was disappointing. Although we were expecting some moderation in growth, a couple of indicators were remarkably weak. However, we are probably looking at a temporary development, partly driven by special factors such as adverse weather conditions in the US. Last week also produced some data more in line with our long-held views. As a result, we stick to our guns that the global economy is on an upward trajectory that will deliver economic growth this year above trend in some countries, and around or above trend for the world as a whole.
  • Interest rates: The ECB disappointed markets by keeping its policy unchanged. The reason for the ECB’s inaction seemed to be a desire to wait for more information rather than the sense that further steps were not justified. We remain of the view that there is a powerful case for further monetary policy easing and expect action at the March meeting. Janet Yellen, the new Chair of the Federal Reserve will give her first monetary policy testimony before the House on Tuesday and before the Senate on Thursday. There are two big issues at play. The first is the path of tapering asset purchases going forward given recent weak data, while the second is the FOMC’s guidance with regards to the likely eventual timing of policy rate hikes.
  • FX: Last week, emerging market currencies recovered and this resulted in an overall improvement in sentiment on currency markets. Although volatility might continue, positive fundamentals in emerging markets suggest a crisis is unlikely. The US dollar weakened due to lower safe haven demand and weaker economic data, while the ECB’s inaction supported the euro. We expect EUR/USD to head lower in the coming months.