WITH Christmas just around the corner (according to one retail analyst, seasonal merchandise has been on the shelves since early August – a new record), markets are now focusing on the final quarter of the year. The Federal Open Market Committee’s meeting tomorrow will be closely watched for hints about how far away the Fed’s taper is. In the aftermath of a weak, pre-US government shutdown September jobs figure, investors will also be looking for clues about the strength of the US economy, and whether we can expect an economic pick-up heading into round two of the budget and debt ceiling debates early next year.
The market sensitivity of tapering, and the dovish stance of the next Fed chair Janet Yellen, have been cited by Capital Economics analysts as reasons why the Fed will err on the side of caution, and put forward modest tapering measures. Asset purchases will likely drop to $75bn (£46.4bn) per month, but Capital Economics doesn’t see it happening before March.
UK GILT YIELDS OUTPERFORM
In the UK, preliminary data showed the economy growing at its fastest pace in three years over the third quarter. UK GDP rose by 0.8 per cent on a quarterly basis, and 1.5 per cent compared to the same period in 2012.
Capital Economics argues that strong GDP figures show that the UK recovery is becoming more broad-based, and that the economy should be able to handle hefty upcoming energy price hikes. The inflation outlook has been helped by other commodity price movements, and this indicates that the squeeze on living standards should gradually improve next year.
And as City Index’s chief global strategist Ashraf Laidi points out, strong GDP figures come just three weeks after the IMF lifted its growth forecast for the UK, and UK 10-year gilt yields have outperformed their counterparts in the US, Canada, Germany, China and Switzerland since late August. Stronger gilt yields, however, are nothing new. We’ve seen this trend for most of the last six years.
Importantly, Laidi says that – even though the pound has been the best-performing G10 currency over the last three months – a favourable future move for sterling could come from the Bank of England’s attempts to talk down bond yields, given all the recent positive data. If the Bank decides to gently encourage sterling strength to counteract stubbornly high inflation, the pound could be further supported.
Louisa Bojesen is anchor of CNBC’s European Closing Bell. @louisabojesen