ECONOMETER

As the end of the year nears markets will still need to get through a heavy week in terms of events and data releases before winding down. The main event is the Federal Reserve FOMC meeting on Tuesday and Wednesday and trading direction is likely to be limited ahead of this. There remains a considerable degree of uncertainty about the timing of Fed tapering, with most market participants split between this week and January 30th. We see a one in three chance of Fed tapering beginning this week, with our bet on a January move.

There are also plenty of US data releases on tap including the December Empire manufacturing and Philly Fed surveys, industrial production, CPI inflation, Q3 current account balance, housing starts, existing home sales and Q3 GDP this week. The data will be mixed with manufacturing surveys showing little improvement, home sales declining while in contrast GDP will be revised higher and industrial production will reveal a decent gain.

In Europe there is also plenty to digest amid thinning market liquidity. The final EU summit of the year on 19-20 December will focus on the steps towards banking union while Eurozone flash manufacturing and confidence purchasing managers confidence indices to be released today will show some, albeit limited improvement. Further gains in the German ZEW investor confidence and IFO business confidence surveys are likely to be recorded in December although the surveys are unlikely to match the pace of recent gains.

The UK will also reveal further economic clues in the form of the CPI inflation, jobs data and Bank of England Monetary Policy Committee (MPC) minutes. In particular, the minutes are unlikely to reveal any urgency to change policy despite the faster than anticipated drop in the unemployment rate. In terms of central banks the Bank of Japan is set to leave policy unchanged given recent the progress on inflation while the Reserve Bank of Australia (RBA) minutes will reveal further focus on the strength of the AUD.

The intense focus on the Fed means that there will very limited market movements until after the outcome of the meeting. It is unclear whether the recent slippage in US equities has been due to renewed nervousness about Fed tapering or simply year end profit taking. Either way, a delay in Fed tapering may provide some, albeit limited relief to risk assets.

The USD will benefit if tapering is announced this week, but much will depend on what US bond yields do. Recent moves in currency markets are looking increasingly stretched, with EUR and GBP failing to build on their recent gains, while USD/JPY is also struggling to move higher. This may continue over coming days as FX market activity thins further.