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We confirm our call that the FOMC will hike rates by 25 bps at the December FOMC meeting. The October employment report cinched the case for a December liftoff, in our view. Monetary policy will still remain quite accommodative for some time as we see a gently rising rate trajectory with the Fed moving at a gradual pace towards a more normal rate structure.
Our Quantitative Easing impact indicator continued to edge down in October, following the virtually across-the-board deterioration in monetary and financial conditions observed over the summer. The monetary policy transmission channels that most immediately responded to the launch of the policy at the start of the year are those that have deteriorated most.
The meeting of the Bank of England on 5 November proved to be a non-event. The BoE left its monetary policy unchanged. The November Quarterly Inflation Report is dovish and the new projections for inflation suggest that the process of normalisation in monetary policy will come later than was thought back in August. The BoE expects CPI inflation to overshoot the 2% target in two years, which we read as a hawkish signal relative to market interest-rate expectations.
Highlights: In Russia, from economic legitimacy to military legitimacy? In Poland, the Conservatives are victorious in the general election. In Egypt, external support is probable and monetary policy is coming under scrutiny. Economic growth apart, development issues are on the agenda in Côte d'Ivoire. In China, the economy is holding up. In Latin America, democracy is much loved … but still some way off.
Q3 real GDP growth rose at a 1.5% annual rate, following a 3.9% increase in Q2, while the core PCE deflator slowed to a 1.3% rate in Q3. Domestic final sales grew at a healthy 3.0% pace led by a solid 3.2% advance in consumer spending. The deceleration in growth reflected an inventory correction that trimmed 1.44% points from Q3 growth. We see GDP growth reaccelerating in Q4 as consumer spending powers ahead and the inventory correction will be largely completed.
The fed funds target range was maintained at 0 to 0.25% as widely expected. And the FOMC guidance continues to anticipate that "it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
The housing market is picking up in 2015, with a 17% yoy increase in sales volumes in the new-build segment in the first half and a 10% yoy rise in sales over the first eight months of 2015 in the pre-owned sector. Prices are slightly declining, by around 2% yoy. Two factors explain the rebound: the support plan for new-build homes and the level of mortgage lending rates, considered close to bottoming. It nevertheless seems premature to talk about a lasting market recovery.
Edition November 10, 2015
QE Impact Index - ECB Targets
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