-        UK’s MPC was probably unanimous in voting for no change (09.30 GMT)

-        FOMC minutes may provide insight on how the Fed viewed the shutdown (19.00 GMT)

-        Falling gas prices probably pushed down US inflation in October (13.30 GMT)

 

Key Market Themes

The US stock market has continued to rise steadily since the start of the month, with the S&P 500 temporarily climbing above 1,800 for the first time. In contrast, emerging market equities have generally struggled, despite faring reasonably well in the last couple of days. However, we doubt this underperformance, which has been a feature for most of 2013, will continue next year.

 

For a start, the relative growth story is unlikely to weigh heavily on emerging market equities. Admittedly, the structural slowdown in the major BRIC economies has kept them under pressure for much of this year and this picture has not changed. And the economic outlook in the US has improved. However, growth in the emerging world as a whole is still likely to be faster than in the developed world.

 

Furthermore, we do not expect the eventual shift in the Fed’s monetary policy stance to be a significant drag on emerging market equities. Granted, their performance over the past year has been heavily influenced by expectations as to when the Fed will start tapering. So there might be some initial weakness, particularly in the assets of countries that have been heavily dependent on capital inflows to finance current account deficits.

 

But most emerging market economies are now better placed to withstand a less accommodative Fed than they have been in the past. What’s more, the US central bank has been at pains to indicate that it will reduce its stimulus only very gradually. We would therefore not expect wholesale capital flight from these markets.

 

Of course, we might be wrong about the prospect of a relative recovery in the price of emerging market equities. But their sustained underperformance has tended to occur only when there has been a major economic or financial crisis (see Chart 1 on page 1), neither of which we foresee. Indeed, in that regard, 2013 may well turn out to be the exception to the rule. (Jessica Hinds)

 

Meanwhile, the media picked up on the fact that the OECD has cut its world GDP growth forecasts for this year. But as the OECD publishes forecasts only once every six months, the latest numbers are being compared to those published in May, and as such they tell us nothing we did not already know. The reduction since then is almost entirely due to the OECD catching up with the fact that growth in emerging economies has slowed. For next year, the OECD still looks too optimistic, in our view, as it expects growth of 3.6% compared to our forecast of 3.3%. Its forecasts for the US and euro-zone are higher than ours, and for China it is still strikingly optimistic, projecting growth of 8.2%. (See Chart 2.) (Andrew Kenningham)

 

What to watch for today: US

We expect the minutes of the late October FOMC meeting (19.00 GMT) to provide more insight on what impact officials expected the government shutdown to have and whether they were worried about further disruptions in the new year. The statement issued immediately after the meeting did not even make any explicit reference to the shutdown. We will also be looking for the latest assessment on how officials thought the labour market was doing. That said, these minutes are essentially already out of date because they pre-date the much better-than-expected October payroll figures. (Paul Ashworth)

 

Meanwhile, we expect annual CPI (13.30 GMT) inflation to fall to a four-year low of 1.0% in October, from 1.2% in September, and this is likely to mark the trough. Headline inflation should then move up towards the core rate of 1.7%. Our calculations suggest that consumer prices were unchanged last month. A fall in gasoline prices of nearly 3% m/m and a small drop back in food prices should have been enough to offset the 0.2% m/m rise in core prices that we expect. The wildcard is whether the government shutdown had any impact. Prices are normally collected throughout the month, but this month the sample would have been restricted to the second half. (Paul Dales)

 

Retail sales (13.30 GMT) were probably unchanged last month, as a price-related decline in gasoline station sales and a further drop back in auto sales offset the gains in underlying sales. The weekly chain store data suggest that sales excluding gasoline, autos and building materials increased by 0.3% m/m. While that would be down from September’s 0.5% m/m increase, it would go some way in supporting fourth-quarter consumption growth, especially if the shutdown has pushed back spending into later in the quarter. (Amna Asaf)

 

The pending home sales data suggest that existing home sales (15.00 GMT) fell further in October. Existing home sales, which lag the new home sales figures, still look to be suffering the effects of the 120 basis point increase in 30-year mortgage interest rates between May and August. The steep drop in pending home sales in September points to another fall last month. We expect a 3% m/m drop in existing home sales to 5.13m annualised. (Paul Dales)

 

Continental Europe

No major data or events scheduled for today.

 

Q3’s rebound in Norway’s mainland GDP growth (data released on Tuesday) concealed mounting evidence that the country’s boom is fading. Mainland GDP growth, which excludes the oil and shipping sectors, accelerated from 0.3% to 0.5%. The rise was mainly due to a big increase in the volatile inventories component. Household spending grew at its slowest pace since Q2 2010, while exports contracted sharply. Overall, we expect Norway’s economy to slow over the coming year as households continue to consolidate their balance sheets. (James Howat)

 

Germany’s ZEW survey for November (published on Tuesday) provides some evidence that the economy has continued to expand in the fourth quarter, but at a relatively modest pace. The rise in the expectations index from October’s 52.8 to 54.6 was a bit stronger than anticipated and left it at the highest level for about four years. In the past, such readings have been associated with annual GDP growth rates of 2.5% or more, well above the 0.6% rate registered in Q3. However, the current conditions index slipped slightly for the second month running, from 29.7 to 28.7. This might suggest that the pace of recovery has slowed a bit further after the acceleration seen over the summer. (Jonathan Loynes)

 

UK

The minutes of November’s Monetary Policy Committee (MPC) meeting (09.30 GMT) are likely to show the Committee unanimous in favour of sticking with the current monetary policy stance, given favourable prospects for both growth and inflation. The MPC will have had much of the analysis contained in last week’s Inflation Report to hand in making its decision to keep policy on hold. So while the Report’s forecast of stronger GDP growth may have raised some inflationary concerns, any disquiet should have been quelled by expectations of a lower path for inflation. (Martin Beck)

 

Japan

This week’s only major data release is today’s external trade report for October (23.50 GMT, Tuesday). The y/y growth rates of both exports and imports probably jumped, mainly reflecting a particularly low base from the same month a year earlier. The overall trade balance is likely to improve only slightly after recording a record deficit (in seasonally-adjusted terms) in September, while remaining firmly in the red. (Marcel Thieliant)

 

Other Asia-Pacific

No major data or events scheduled for today.

 

Latin America

No major data or events scheduled for today.

 

Emerging Europe

Turkey’s central bank (CBRT) left its key interest rates on hold on Tuesday, as expected. At the same time, it eliminated its one-month repo facility which, all else equal, should lead to a small increase in market interest rates. With the current account deficit widening and the recent credit boom looking unsustainable, we would not be surprised to see the CBRT raise its O/N lending rate over the coming months. (William Jackson)

 

Middle East & Africa

The Central Bank of Nigeria’s (CBN) decision to keep its benchmark policy rate on hold at 12.00% on Tuesday was widely expected. The current low rate of inflation means there is no immediate pressure to tighten policy and we expect interest rates to stay on hold over the first half of 2014. But growing concerns over loose fiscal policy mean we now expect 100bp of hikes in the second half of next year. (Shilan Shah)

 

Key Data and Events

Tue 19th                     23.50       Jpn       Trade Balance Adj. (Oct)

                                  23.50      Jpn       Trade Balance Unadj. (Oct)

                                  23.50      Jpn       Exports (Oct)

                                  23.50      Jpn       Imports (Oct)

Wed 20th                        -         Spa      Trade Balance (Sep)

                                  07.00      Ger       PPI (Oct)

                                  08.00      SA        CPI (Oct)

                                  09.00      Mly       CPI (Oct)

                                  09.30      UK        MPC Minutes (Nov)

                                  13.30      US        Consumer Prices (Oct)

                                  13.30      US        Retail Sales (Oct)

                                  15.00      US        Existing Home Sales (Oct) (ann.)

                                  15.00      US        Business Inventories (Sep)

                                  19.00      US        Fed’s FOMC Minutes (29 th-30th Oct Meeting)

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