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Macroeconomic Analysis

Good morning,

Mixed start seen with little direction coming from US and Asia;

RBA and BoJ unchanged but messages are very different;

Yen rallies on warnings from Japanese PM Abe about yen weakness;

UK in focus with data and BoE credit conditions survey being released.

European futures are pointing to a mixed start to the trading session on Tuesday, as investors take little direction from the US and Asian sessions overnight and look forward to another fairly quiet day in terms of major economic events.

Things don’t really pick up until Wednesday when we’ll get the minutes from the September Fed meeting which could provide further insight into the timing of the first rate hike, with markets still pricing it in for the middle of next year despite the fact that the economic data continues to remain strong and support earlier action from the central bank.

The problem with big events like these, as well as the latest Bank of England decision which comes on Thursday, is that they can prompt a little bit of caution from investors as they don’t want to get caught out by these central banks which is very easily done. This is especially the case during trading sessions like yesterday when there is no big economic releases or news flow to provide a catalyst for some volatility.

Things should be a little better today, although once again we’re getting little direction from the Asian session overnight with Chinese markets closed for a second day. The US session overnight was quite choppy as the lack of data and news flow prompted some early profit taking on the gains made late last week as the major indices approached some important technical levels. Eventually US indices ended the day marginally lower but I don’t think there’s much we can read into that.

This morning we’ve had two central bank decisions, with the Reserve Bank of Australia and the Bank of Japan leaving rates unchanged but sending quite different messages. The RBA stressed that while there was not expected to be any change in its stance for some time, the Aussie dollar remains strong, especially when compared with the weakness in commodity prices. Given both the strength in the US dollar recently and its commitment to leave rates unchanged, this doesn’t necessarily mean much at this stage although traders will monitor these comments in the coming months to see if the language gets stronger.

The BoJ on the other hand pointed to the weakness in industrial production and highlighted the expected prolonged weakness in inflation at around 1.25%, while one policy maker even suggested making the 2% target a medium to long term goal but was heavily outvoted by eight to one. This would ordinarily suggest that the central bank may look to ease monetary policy further in the coming months but the comments on the damaging impact of the weak yen on small businesses and households from Japanese Prime Minister Shinzo Abe appear to have overshadowed this. We’ve seen in the past how much influence Abe can have on monetary policy decisions so these comments cannot be overlooked, and they haven’t. The yen strengthened against the dollar following these comments.

The focus will predominantly be on the UK for much of the European session, as industrial and manufacturing production figures for August are released. These numbers are expected to bounce back following the previous months slight slowdown, once again reflecting the fact that while not every month is going to be great, the UK economic recovery is both strong and sustainable and any period of weakness is only temporary. These releases will be accompanied by the BoE credit conditions survey which should provide useful insight into bank lending in the previous quarter which can tell us a lot about both the health of the banks themselves and consumer and business appetite for loans, which only grows with confidence in the economic outlook.

Later on we’ll also get the NIESR GDP estimate for the three months to September which could act as a preview for the first official release which is due in a couple of weeks. The numbers for the last couple of months haven’t been as strong as we’ve become accustomed to which is to be expected but as long as we get another decent figure, above 0.5%, the markets are likely to be happy enough.

Ahead of the open, the FTSE is expected to open 13 points higher, the CAC 7 points lower and the DAX 10 points lower.

Published On Tue, Oct 7 2014, 05:31 GMT

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