All eyes on US at 2PM
Ahead of the Bank Holiday weekend on Monday, markets continue to trade quietly with all eyes watching Fed Chair Bernanke’s speech this afternoon. Although France, Italy, Spain and Belgium reaffirmed their short-selling ban on financial stocks, equity markets are still lower and we doubt that much risk will be placed in London this afternoon.
We do not have a huge amount of conviction on the direction of revisions to UK second quarter GDP data. An unexpected fall in June manufacturing output meant that industrial production fell by 1.6% in the three months to June compared with the Advance estimate of 1.4%. This puts some risks on the downside. The fiasco with construction output, which was originally measures at 0.5% on the month, then 2.3% before being revised back to 0.5% after ONS spotted an error in its construction points to upside risks as did the upward revision to June retail sales. In the end, we suspect that it remain unchanged at 0.2%. Hopes of any substantial upward revision would come from the service sector, as measuring output in April due to the lateness of Easter and the royal wedding holiday will have been extremely difficult.
At the start of the week, Bernanke’s speech today at the Kansas Fed’s annual economic symposium could have been simplified as ‘QE or not QE’. However, as the week has worn on, there has been a much more nuanced debate about the limits of monetary policy and whether any further asset purchases would be able to stimulate the economy. While the first round of asset purchases were aimed at restoring liquidity to the banking system, the second set of purchases were supposed to stimulate lending activity by creating domestic inflation and therefore negative real rates. In the event, most of the new liquidity flowed through to commodities markets and outside the US without doing much to stimulate domestic demand. With a speech from President Obama on job creation due in September, we suspect that Bernanke will want to discuss ways in which monetary policy can stimulate the economy at the zero bound, which means fixing the monetary transmission mechanism (banking system). This leaves the Fed with a variety of tools rather than simply bond purchases including negative reserve rates –to encourage bank lending as well as ‘twist’ operations to lower long-term bond rates to also encourage lending. Bernanke will undoubtedly point to the wide range of tools available to the Fed to avoid the risk of deflation next year, while pledging to do all he can to reduce unemployment. If the market is looking for clear messages it might be disappointed.
Consensus is looking for the second estimate of US Q2 GDP to be revised down from an annualised 1.3% to 1.1%. We believe that this is a little overly pessimistic given the upward revision to June durable goods orders. However, an increase of 0.1pp or so to annualised growth hardly signals a solid rebound.