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What will the central banks do?

What will the central banks do?

Market sentiment has been improving as the week has progressed. Yesterday, UK Manufacturing Production showed slight growth for August against expectations of a decline, whilst industrial production fell by less than had been expected. There was also positive data out of Germany, where the recent series of unpleasant surveys came to an abrupt end with, industrial production figures for July increasing by 4%. However, future orders declined by 2.8% hinting towards an imminent slowdown.

The European Central Bank (ECB) and the Monetary Policy Committee meet today and markets will be looking for any signals that further QE easing may be imminent to prevent any imminent slow down.

It is expected that the Bank of England will announce that policy is to remain unchanged. The minutes of the most recent meetings have taken on a more dovish tone due to the series of weak data from the UK. But, it is unlikely that there will be a significant enough number of members who would support further QE at the present time. This is despite the Institute of Directors, Europe’s largest membership organisation for business leaders, calling for further QE to stimulate growth.

The ECB is likely to announce that it now sees inflation risks as neutral, therefore it seem likely that rates will remain on hold for now. This could eventually lead to some Euro weakness against sterling if fundamentals again start to drive the markets. As Sterling, is currently weaker than at the last ECB meeting when there was still some potential for a rate hike in October or November. It is unlikely that President Trichet will announce any reverse to July’s 25bps hike, despite, the recent deterioration of economic data in the Euro zone, which suggests that states are struggling to cope with monetary tightening, at the same time as implementing austerity measures.

President Obama was supposed to use the day after Monday’s Labour Day holiday to unveil not only a job creation package, but also to spell out his proposals to consolidate government finances. Political squabbles have set this back to Thursday and the 8PM timing of the speech to a joint session of Congress means that we will have to wait until Friday morning before Europe gets a chance to react.

However, Bernanke’s Jackson Hole address set the intellectual case for stimulus as he suggested that reducing unemployment would keep the economy growing at is long-term potential. Therefore the Fed will support any short-term stimulus as long as there are concrete and sensible plans to address fiscal consolidation in the medium- to longer-term. The President will doubtless unveil a plan; the real question is whether he can persuade Congress to let him implement it.

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