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Economic week ahead: All eyes on the Federal Reserve

Matt Quigley

The US Federal Reserve’s two-day policy meeting will set the tone for global markets this week as leaders of the G8 gather for a summit in Ireland.

Fears that America's massive stimulus programme may soon come to an end has sent markets into a tizzy. (Reuters)

The Federal Reserve’s meeting on Tuesday and Wednesday will set the tone for global markets this week. When will the central bank begin to pull back on its quantitative easing programmes? Markets will get further clues on Wednesday.

Elsewhere in the world, investors in Europe and Asia will be on the look-out for a series of manufacturing snapshots and, in Africa, central bank decisions are expected from Mauritius, Morocco, Namibia and Ghana. Here is your guide to the week ahead:

United States
America’s central bank – the Federal Reserve – has kept its target for overnight lending between banks at almost zero since December 2008 and is buying $85-billion of treasury and mortgage-backed securities every month in a bid to boost growth in the world’s largest economy. Fears that this massive stimulus programme may soon come to an end has sent markets into a tizzy.

Although the bank is highly unlikely to make any substantive changes in policy at this week’s meeting, chairperson Ben Bernanke and his colleagues on the Federal Open Markets Committee are likely to try to reassure markets that the decision to taper the central bank’s quantitative easing programme and raise interest rates will be data dependent and gradual. The punch bowl will be drained, not taken away.

In addition to Bernanke’s post-meeting press conference on Wednesday, economists and investors will pay close attention to the revised economic projections released after the two-day meeting concludes. Most analysts believe that policymakers will downgrade their 2013 growth and inflation numbers slightly.

Beyond the Federal Reserve’s meeting, US markets will monitor a series of economic data releases over the coming days.

On Monday, investors will watch for the Federal Reserve Bank of New York’s Empire State manufacturing survey and the National Association of Home Builders’ housing market index.

On Tuesday, last month’s consumer inflation and housing starts figures will take centre stage.

Finally, on Thursday, weekly jobless claims figures, May’s existing home sales figures and the Federal Reserve Bank of Philadelphia’s closely followed regional manufacturing gauge will dominate.

Europe
Leaders of the G8 – the world’s eight largest economies, excluding China and Brazil – will gather in Northern Ireland on Monday and Tuesday for a summit. The state of the world’s economy, the situation in Syria and programmes aimed at combating tax avoidance are expected to top the group’s agenda.

Germany’s Centre for European Economic Research – Zentrum für Europäische Wirtschaftsforschung – will release its closely followed economic sentiment indicator on Tuesday. Economists expect the index – based on a survey of roughly 350 analysts – to improve to a reading of 37.8 from last month’s 36.4. Any reading above zero indicates optimism.

European markets will likely take their cues largely from events in America on Wednesday. But on Thursday, attention will turn back home for a series of purchasing managers’ index (PMI) releases.

Economists expect flash PMI results covering the services and manufacturing sectors of most of the continent’s largest economies to remain below the key 50-mark separating expansion from contraction. The composite PMI for the 17-member eurozone as a whole is expected to edge up slightly, from 47.7 in May to 48 in June.

Thursday will also bring the UK’s latest retail sales figures. Markets expect the numbers to show that broad sales – including autos and fuel – rose 0.8% in May from April, an improvement on April’s 1.3% decline from March. Excluding autos and fuel, sales likely rose 0.9% on a monthly basis in May.

Asia
On Tuesday, investors will be paying close attention to the Reserve Bank of Australia (RBA)’s release of the minutes from its most recent monetary policy meeting. Markets will be looking for hints at the prospect for further easing.

The RBA held firm on rates earlier this month after cutting them in May. Most economists are expecting officials to reduce rates further over the coming months amid concerns that the continent’s economy is slowing. The central bank has cut its benchmark rate by 200-basis points since late-2011.

On Wednesday, Japan will release May’s trade data. Most economists expect high energy imports to outpace exports in Asia’s number two economy, leading the country to post an 11th consecutive monthly trade deficit.

The median forecast among analysts surveyed by Market News International is that May’s deficit will swell to ¥1.169-trillion, its highest level since January’s ¥1.634-trillion gap. Exports are expected to have risen 7.1% from a year earlier, up from a 3.8% rise in April. Imports are likely to have increased 10.8%, up from a 9.5% rise in April.

On Thursday, attention will shift to China for the release of the HSBC China manufacturing PMI. Markets expect the forward-looking index to slide deeper into contraction territory. The median forecast of analysts polled by Reuters is for a reading of 49.2, down from 49.6 in May.

Finally this week, governor Haruhiko Kuroda of the Bank of Japan will deliver remarks to Japan’s National Association of Shinkin Banks on Friday. Kuroda has been criticised recently for failing to calm volatile bond markets, so his comment will be closely watched by investors.

Africa
Central bank decisions in Mauritius, Morocco, Namibia and Ghana will dominate Africa’s economic calendar this week.

Mauritius’ central bank will announce its latest rates decision on Monday. Economists expect officials to leave the bank’s 4.9% benchmark lending rate unchanged.

Consumer inflation in the island economy decreased to a year-on-year inflation rate of 3.7% in May from 3.8% in April. Almost two-thirds of respondents to a recent central bank survey expect annual inflation to remain below 4.5% by year’s end. With inflation under control, policy is likely to continue to favour stimulating economic growth over the coming months.

Morocco’s central bank – the Bank Al-Maghrib – will announce its quarterly rates decision on Tuesday. With inflation pressures limited, officials are likely to leave the bank’s key policy rate unchanged at 3%.

The Bank of Namibia’s policy announcement will follow on Wednesday. Governor Ipumbu Shiimi said last month that inflation would need to reach double-digits for a “consistent period” before he would consider interest rates and most economists suspect that Namibian officials will not tighten policy until their counterparts in neighbouring South Africa do so.

Officials in Ghana are also expected to announce their rates decision this week. The Bank of Ghana raised its policy rate by 100-basis points to 16% last month and, given continued upward inflation risks and pressure on the cedi, is widely expected to continue its tightening stance.

Consumer inflation in Ghana accelerated for the fourth consecutive month in May, increasing to its highest level since April 2010. Price pressures have mounted in recent months due to lower fuel subsidies, a weakening local currency and high levels of government spending.


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