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The contrast is striking between the US economy, which currently seems able to generate self-sustaining growth, and the European and Japanese economies, which despite large-scale stimuli are still posting disappointing performance. In United States, it is undoubtedly private consumption which is mainly driving recovery. Housing and productive investment are also upbeat, while currently low energy prices are also giving an extra little boost.
The combination of falling oil prices and a lower-than-expected TLTRO allotment is likely to trigger both contingencies for fresh ECB action, ie, a further deterioration in the inflation outlook as well as the inability of existing measures to expand the balance sheet by EUR1trn.
The ECB did not move closer to sovereign QE at today's meeting. In spite of another downward revision to growth and inflation staff projections, the ECB delivered nothing but some futile communication changes. Even the subtle shift from an "expectation" to an "intention" to expand the balance sheet could not be agreed unanimously.
An improving job market and stronger wage gains are expected to be the key driver of the housing recovery next year. We look for housing starts to rise to 1.13 million units in 2015 and 1.38 million in 2016. Mortgage lending standards remain very tight and an expected up-drift in mortgage interest rates as the economy improves will throttle the pace of the recovery. However, signs of easier mortgage financing for credit-worthy borrowers will help at the margin.
The Autumn Statement (to be published on 3 December) will likely reveal significant upward revisions to budget deficit forecasts mainly due to disappointing growth in receipts. Despite the deterioration in public deficit being mostly structural in our view, the government's fiscal mandate expressed in cyclically-adjusted terms would not be out of reach, although by a narrower margin.
In its November Inflation Report the BoE revised "materially lower" its projections for CPI inflation, thereby reinforcing the recent shift in market expectations for a later and more gradual path for monetary policy tightening than expected in August. The revisions have been prompted by a much weaker-than-expected actual CPI inflation and greater disinflationary forces coming from abroad.
The ECB has made a number of important dovish changes to its communication, thereby reaffirming its current strategy without any ambiguity. (1) The reference to a roughly EUR1tri balance sheet expansion target has been included in the introductory statement. (2) The ECB remains unanimous in its commitment to ease further if needed and has tasked its staff with “timely preparation” of such unconventional measures. (3) The Governing Council sees indications for downward revisions to staff forecasts in December.
Edition December 2014
US and european 10Y yields
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