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The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

imony to Congress in May. " /> This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited.

Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice.

The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

imony to Congress in May. " /> This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited.

Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice.

The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

imony to Congress in May. "/> Beginning of the end for QE - Economics weekly

Beginning of the end for QE - Economics weekly


Beginning of the end for QE - Economics weekly

Speculation on when US quantitative easing (QE) will end has been moving markets since US Federal Reserve Chairman Ben Bernanke’s <h3>Disclaimer</h3> <p><span class="rte-disclaimer">This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. </span></p> <p><span class="rte-disclaimer">Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice. </span></p> <p><span class="rte-disclaimer">The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.</span></p> imony to Congress in May.

Economic Analysis

24 June 2013

People who study the Fed’s tea leaves think Bernanke’s press conference last week heralds the slowing of QE from the autumn. Some fear that reining in the stimulus later this year is a risky move, but the US economy looks far stronger than its counterparts in Europe.

Steady as she goes at the Fed…for now

The Fed kept rates on hold and maintained the pace of its quantitative easing programme. But after stimulating the economy for nearly six years, thoughts in Washington are turning to the end game. It’s complicated. The Fed has two jobs. First, to keep inflation under control. This isn’t a problem at the moment with prices up 1.4%y/y in May and Fed chiefs expecting inflation to stay below their 2% target beyond 2015.

The second job is to maximise employment. The pace of job creation has been decent this year but not enough to make a big dent in unemployment, which at 7.6%, remains too high. What's more, some of the fall in the rate is down to people leaving the labour market. On both fronts, therefore, there is a case for the Fed to keep its foot on the gas. But Fed Chairman Ben Bernanke is preparing us for a slowdown in QE. If it comes this year, it will be a Christmas gift.

A bit of retail therapy in the UK

It might have been the coldest May since 1996 but that didn't stop UK consumers spending more after a poor April. Retail sales were up 2.1%m/m in May as sales volumes rose to their highest level. Most retailers other than department stores saw growing sales volumes. Food stores in particular recorded strong growth, albeit off the back of a slump last month.

While May's figures add to the possibility of stronger economic growth in Q2, they also highlight the pressure faced by consumers to maintain their standard of living. Between Q1 2008 and Q1 2013, the volume of retail sales grew by just over 1%, while the value of retail sales rose by close to 13%

Squeeze on consumers tightens a little in May

After April's larger than expected fall in CPI inflation, normal service resumed in May as the rate of inflation rose to 2.7%y/y, from 2.4% in April. This puts inflation back around the level experienced over the six months since October last year.

The main culprits squeezing tighter on consumers’ wallets were the cost of air fares, motor fuels and clothing. Consumers were spared on the food and non-alcoholic beverages front, with prices unchanged on the month.

The minutes of the MPC's June meeting were a humdrum affair

Whilst the Fed’s meeting moved world financial markets, the Bank of England’s rate setters did little to merit investors’ attention. There was no change in voting (6-3 to hold quantitative easing at £375 billion; unanimous to hold the Bank rate at 0.5%) and the Committee noted there had been nothing unexpected in economic indicators over the month.

Arguably the most interesting development for MPC watchers was the hint of a split among the majority who voted to leave QE unchanged, between those who think the policy is a spent force and those who think it could yet serve a useful purpose.

We always assumed this was the case. But the suggestion that there are at least two people in the latter group means that if the UK's recent purple patch peters out, it may not be the beginning of the end for QE on this side of the Atlantic. Indeed, we could yet see more QE in the second half of 2013.

Eurozone struggles to turn the corner

The Eurozone composite Purchasing Managers’ Index (PMI), covering both the manufacturing and services sectors, rose from 47.7 to 48.9. Being below 50 still indicates a contraction in activity, but June’s reading does represent a 15-month high, so at least it’s heading in the right direction.

Germany's services PMI moved back above 50 for the first time in three months, but unfortunately its manufacturing index went the other way. Depressed new export orders point to weak global demand, just when the Eurozone could do with a trade-led boost.

Slowing growth in China and bad signs for global trade

China's manufacturing PMI for June fell to 48.4 - the lowest level since last September. But most concerning was a sharp fall in new export orders. The five-point fall to 44 is the lowest level since the dark days of early 2009 when global trade froze following the financial crisis. A repeat of that period is unlikely, though global trade remains stuck in a low gear.

But the big story in China is a sharp rise in the interest rates that banks charge one another (China's version of LIBOR). China has been trying to slow its exceptionally high credit growth recently. Keeping the banks short of cash seems to be the new tactic. The goal is undoubtedly a sensible one but the approach does raise the possibility of a serious credit crunch and drop in growth if mishandled.

 

Disclaimer

This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited.

Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice.

The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

 

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