Economic and market briefing: next week in focus
0Next week’s particularly busy for market participants with the US Presidential Election, key central bank meetings and possible action by the Greek government as part of the basket of measures to address the budget problems.
On the US Presidential election, re-election of President Obama likely changes little, with a continued push for tax hikes to reduce the deficit, while Mr Romney would focus on tax cuts and longer term work on restraining spending. Mr Romney’s plans if enacted would likely mean deficits somewhat larger than some might expect for the first several years of a Romney administration and there has also been suggestion that a Romney victory is negative for the rates market. But while Mr Romney has expressed opposition to Fed asset purchases (QE), such rhetoric has diminished of late, and the Fed would likely persist with their policies, until or unless Mr Romney selects a new chair for the Federal Reserve. We can note that Mr Romney’s chief economic advisors such as Greg Mankiw or Glenn Hubbard are relatively mainstream and we should not therefore anticipate a substantial change to policy – particularly the ‘low for the longer term’ rate guidance which is a critical issue for markets. In addition, whilst a Romney administration would likely see some regulations scaled back, not enforced, or softened, full repeal of Dodd-Frank or “Obamacare” looks unlikely given the likely composition of Congress (particularly the Senate), although rule writing would likely be more business friendly. Such activities could help to boost business confidence and help to spur additional non-residential investment.
The European Central Bank (ECB) meets on Thursday and is unlikely to deliver any surprises this month. We expect a similar statement to the October one: risks to growth on the downside and risks to inflation balanced. ECB President Draghi will likely sound non-committal regarding possible future rates cut, but may acknowledge that data remain poor and are consistent with further monetary stimulus, leaving room for lower rates to follow. We expect no more news on the OMT – other than reverting once more to government actions – or on other non-standard measures of monetary policy.
The actions of the Bank of England, who also meet on Thursday look less easy to call. On balance we expect that the MPC will keep asset purchases and the Official rate unchanged. Recent data have been strong, with tentative positive evidence around the FLS and hawkish members of the MPC have started to make a solid case against further QE in recent months.
The Greek government is expected on Monday to submit before parliament an omnibus bill listing prior actions for the EU/IMF review, including the debated labour reforms. A vote on the bill is planned to take place on Wednesday. The junior coalition partner, the Democratic Left party, has threatened to vote against the bill due to its objection to the proposed labour reforms. A few Pasok MPs have also indicated that they will vote against the bill. Currently, the coalition government has 175 MPs (New Democracy 127, Pasok 32, Democratic Left 16) and although political risk has increased over the past few weeks, it looks likely that the bill will go through, amidst much sounding off in the run up to the vote. The 2013 budget agreed by the coalition partners is expected to be voted on in parliament on 11th November, and the Eurogroup is expected to hold an extraordinary meeting on Thursday to discuss Greece, ahead of a planned Eurogroup meeting on 12th November in which final decisions are expected.
The European Commission will publish updated economic forecasts on Wednesday. Governments’ 2013 growth forecasts may be challenged, leading to larger deficit expectations but the focus should be on structural deficit reductions, given the emphasis that European authorities have recently placed on the need to preserve growth prospects. As ever, 2013 projections assume no policy change from what has already been voted in national parliaments and as such, 2013 forecasts may only tell us how much additional effort governments need to legislate on before the end of the year to meet targets.
On the data front, attention will be on September industrial production releases. Markets will closely scrutinize these, as the first hard data following the ECB OMT announcement. There have been tentative signs of stabilization in financial conditions through TARGET 2 and money supply numbers, but hard data are likely to remain mixed for some time. The data series begin with Germany and the UK on Tuesday, Spain on Thursday and conclude with France, Italy and Greece on Friday.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
