Tomorrow’s FOMC meeting a non-event – expect weak Q4 US GDP but focus on the underlying trend

Only seven weeks after the FOMC in December decided to replace its Operation Twist with more QE, the Fed’s policy and forward guidance will most likely remain unchanged tomorrow after the first FOMC meeting in 2013.

Despite suggestions from the December FOMC minutes that the Fed’s asset purchases could stop well before the end of the year, it is obviously way too soon for the central bank to change course. The Fed is therefore likely to maintain in policy stance tomorrow, buying USD 40bn of agency mortgage-backed securities and USD 45bn of longer-term Treasuries per month.

We expect the Fed to stay the course with the current pace of buying through H1 2013. However, around mid-2013, we expect the central bank to signal a gradual slowdown of its asset purchases, paving the way for a complete halt to QE3 by the end of 2013.

Tomorrow’s key US data release is the Q4 GDP report. I expect real GDP growth to plunge from a 3.1% annual rate in Q3 to less than 1% in Q4. My forecast is 0.7%, while the consensus estimate is 1.1%.

While such an outcome might temporarily dampen some of the risk-on mood in financial markets, we think it is important to look at the average of Q3 and Q4 given the big swings in inventories and foreign trade. Thus, a gain in inventories and narrowing of the trade deficit added nearly 1% point to Q3 GDP growth and is set to subtract about the same in Q4. Some of the volatility in the past two quarters is due to the drought in the Midwest and Hurricane Sandy.

Looking instead of final sales of domestic purchases, which is GDP minus inventories and net exports and hence a better measure of the underlying trend, we expect that growth held steady at about 2% in Q4. That would actually be a rather positive performance against a background of Hurricane Sandy at the start of the quarter and the uncertainty surrounding the fiscal cliff negotiations at the end of the quarter.

Our current forecast for Q1 GDP growth is 1.5%, but if Congress finds an orderly deal on the remaining fiscal issues growth should accelerate during 2013 as pent-up demand is released. For more analysis, see US fiscal risks significantly diminished.

Latest research

Preview of Swedish Q2 GDP – households take off

We expect GDP to have expanded by 0.9% q/q in Q2. The second quarter is characterised by strong consumption growth, subdued exports and higher productivity. Our forecast is above the Riksbank’s view. The text has been changed on Tuesday 29 July 13.00.*

Preliminary Prepayments

Preliminary Prepayments

Swedish Morning Briefing - Tuesday July 29

Further sanctions against Russia Israeli PM preparing for long-term conflict

FI Eye-Opener: Gravity

Core bond yields edge higher – yields with some more upside potential today. Spanish and Italian 10-year yields hit record lows. US housing market continues to struggle – confidence indicators positive. Russian sanctions on the agenda again. US house prices and consumer confidence ahead.

Euro Rates Update

The latest Euro Rates Update is now available

Swedish Morning Briefing - Monday July 28

Europe’s debts at record level Higher rating for Portugal

While you were busy ...

If you are just back from holiday, here are a few bullets on what happened while you were busy …

FI Eye-Opener: Prepare for a big week

Bonds rally again ahead of the weekend, but core yields to creep higher today. Equities under pressure on Friday. German Ifo disappoints – UK growth still strong. The surge in LTRO repayments not repeated. Portugal receives good news from Moody’s. What is with Germany and a tighter EU? A huge week ahead: the Fed, US GDP, Euro-zone inflation and payrolls. Italian & US auctions and plenty of coupons and redemptions.

RUB: Central Bank decided to raise the key rate, inflation is in focus

Today Bank of Russia Board of Directors decided to raise the key rate by 50 b.p. to 8%. RUB may find support, but geopolitics will remain the focal point for the Russian currency market.

Week Ahead: 26 Jul - 01 Aug 2014

Big week in the US with GDP, Fed, ISM and payrolls. Flash estimates on July inflation will be out for the Euro Area and ECB will publish the Bank Lending Survey on Wednesday. In Norway the labour market will be in focus. Sweden will be out with both PMI and GDP Q2 (early estimate)

UK: leaving previous peaks behind

Strong GDP growth continued in the UK economy in Q2, with growth coming in at 0.8% q/q, in line with expectations, which was enough to lift the y/y rate to 3.1%, the highest since the last quarter of 2007. On a q/q basis, growth has been running at 0.7-0.8% for five consecutive quarters already, a remarkably stable performance.

Germany: Ifo decline once again highlights external vulnerability

The manufacturing motor sputters but growth is not over.

Sweden: retail sales and lending; households getting more confident

Strong retail sales. Continued increase in household lending.

Swedish Morning Briefing - Friday July 25

Japanese CPI up 3.6% in June Swedish retail sales due at 9.30

FI Eye-Opener: Bulls to strike back today

Yields headed higher on both sides of the Atlantic yesterday. Buying of core bonds to resume today, as concerns over Ukraine/Russia continue. S&P 500 squeezes another high. Market impact from positive PMIs likely short-lived. US economic data mixed. Busy Friday ahead: UK GDP, Ifo, Euro-zone credit data, Russian ratings. Another sizable LTRO repayment to put some upward pressure on the short end.

IDR: Jokowi win paves way for strengthening

The official election result is out and Indonesia has got a new president, the popular Jokowi. This is already priced in the market so IDR will be range-bound for now. It would be IDR positive in a longer perspective, if he succeeds in promoting growth and improving standards of living.

Euro area: PMIs offer hope amidst gloomy headlines

The flash PMIs for July point to a continued recovery in the Euro-area economy. Positive development in sentiment indicators is certainly welcome at a time, when the effect of e.g. the Ukrainian/Russian crisis is weighing on the economy. It is worth remembering that the numbers are unlikely to capture the recent escalation in geopolitical tensions, but the latest weakening of the euro and the ECB’s June easing package, on the other hand, are supportive of the Euro-area economy.

Sweden: Same old story in unemployment

Unemployment bounced back somewhat in June after the stronger than expected reading in May. Seen over the last two years, it is very hard to spot any clear trend downward in unemployment, despite the clear trend upward in employment. Today’s number did not change this overall picture and the expected, future decrease in unemployment seems to continue to be very gradual.

Swedish Morning Briefing - Thursday July 24

South Korea presents stimulus package Reserve Bank of New Zealand lifts policy rate

China: Good PMI no guarantee for growth outperformance

The Chinese economy is currently in a cyclical upturn. But the long-term perspective has not changed. The economy will continue to readjust to the new normal, meaning that a significant pick-up of growth is unlikely.