THE WEEK IN REVIEW
This week, the Federal reserve confirmed that it will reduce its asset-purchase programme by $10bn to $65bn a month. The programme is expected to end by December 2014,which is further supported by the 3.2% annualised growth recorded in Q4. This so-called “tapering” has had a significant impact on emerging markets, particularly on currencies, with sharp devaluations that forced several central banks across Latin America, Africa and Asia to raise rates. Central Banks expect that tightening will prevent too large an outflow of capital, which is detrimental to investment but could also lead to rising inflation as prices of imported goods rise due to the currency devaluation. As Fed tapering is expected to continue, so will the turmoil emerging markets. However, in the coming months, it is likely that investors will start differentiating between those economies that have solid foundations to growth from the others, which should reduce outflows of capital in the most efficient countries.
In Europe, the European Commission Economic Sentiment Indicator (ESI) improved further in January. In the euro area it rose to from 100 to 100.9, and now stands about 1 point above its long term average. The ESI was up in all the countries we follow, especially in France, up 1.8 points, which was a surprise given the current political turmoil. In Portugal, the ESI was up 2.2 points. The indicator now stands just 1.6 points below its long term average. Te largest rise was in household confidence, but we would expect some retraction in consumer confidence in February as the impact of the pay cuts for civil servants will only have been known towards the end of the month and may not have fully translated in the January confidence indicator.
THE WEEK AHEAD
- Portuguese unemployment rate, Q4: After a decline to 15.6%, we expect the unemployment rate to remain broadly stable or to edge down slightly as annualised growth of 0.8% in the fourth quarter is inconsistent with strong gains in the labour market.
- ECB rate setting meeting: The continued improvement in confidence and activity indicators are likely to reassure the ECB that the recovery is well on track, albeit at a moderate pace. On the other hand, inflation continues to fall, in January it edged down to 0.7%. For now, we expect the ECB to leave rates its main rates unchanged at 0.25% and expect the deposit rate to remain flat. Risks to activity remain on the downturn though, particularly due to the Fed’s reduction of its asset purchase programme. Together with low inflation this could lead the ECB to take further action by the March meeting.
- US Non-farm payrolls, January 2013: This will be the most closely watched data release due to its close ties to economic growth in the US and to the the link with the pace of Fed’s tapering. After a disappointing 74 thousand rise in employment in December, consensus is for a 180 thousand rise in January.