Yellen is widely credited with being the architect of the Fed’s forward guidance policy, so her succession will likely mean continuity in US monetary policy. Meanwhile the Government shutdown and the debt ceiling argument in the US is taking its toll on consumer confidence. Talks continue and most people expect a deal to be done before the deadline. But time is running out to avoid a default. For more on the debt ceiling and how a US default would affect the UK and global economies, please see our special report US debt ceiling: deal or no deal?
Fed minutes show QE is here to stay
The September decision not to slow quantitative easing looked like a close-run affair. The minutes of the Fed's meeting show that most members thought it would be appropriate to start slowing asset purchases before the end of 2013. The last two weeks will have changed that expectation dramatically.
The Government shutdown and the battle over the debt ceiling is draining confidence from the US economy, and from its monetary policy-makers. Even if the fiscal situation gets resolved soon, the Fed will want to wait and see what damage has been done. They'll be in no hurry to slow QE down and it will probably be next year before we see taper talk return.
US confidence takes a hit
The University of Michigan's consumer confidence index for early October sank to a nine month low. This was mainly a result of events in Washington. But before we get too carried away with things, we should recall that at the time of the last debt ceiling stand-off in 2011, the index sank to an all time low and consumption expenditure slowed only very marginally. Still, this is not the start to October that we wanted.
UK growth forecast improved
In its most recent World Economic Outlook, the International Monetary Fund (IMF) revised up its UK growth forecasts by more than for any other advanced economy. Growth is now expected to be 1.4% this year and 1.9% next year making the UK the third strongest economy in the G7 during 2014 behind the US and Canada. That didn’t mean a totally clean bill of health however. The IMF’s key proposal for the UK remains that "bank balance sheets should be repaired expeditiously".
UK housing market accelerating
September's RICS survey of estate agents confirmed what everybody already knew - that the UK housing market is moving up a gear. Sentiment about prices among estate agents is the highest it's been for a decade. Incredibly, agents' expectations about sales over the next three months are a record high - a series that began in 1998.
Once you've stopped shaking your head in astonishment, it's important to note that this doesn't mean agents expect the highest number of sales in recorded history. After all, transactions are still 40% below their peak. Rather, they expect higher sales growth compared to the recent past. It measures acceleration, not speed.
Surprise fall in UK manufacturing
Following two consecutive monthly rises in output and continuing positive survey data, the manufacturing sector surprised in August with a 1.2%m/m fall. Though seven of the 13 subsectors grew, it was not enough to offset large declines in pharmaceutical, electronic and optical products and food and drinks industries. The fall in manufacturing output also contributed to a decline in overall UK industrial production (-1.1%m/m). Industrial production is still up for the three months to August, but this latest fall provides a bit of a reality check on the health of the UK recovery.
UK trade: good news, bad news
On the positive side, there was a slight improvement to the UK's trade deficit in August: -£3.3bn against -£3.4bn in July. This was helped by a 1.1%m/m rise in exports and a 0.1%m/m fall in imports. In addition, exports to non-EU countries rose while those destined to the EU fell.
But while August's data might look okay on the surface, the efforts of the UK to boost growth and rebalance via trade have met with little success. For the three months to August, exports were 1.2% down on the three preceding months, while imports rose to their highest level on record.
OBR evaluates its forecasts
Too confident on the economy, not confident enough on the public finances. This was the main conclusion of the Office for Budget Responsibility's recent evaluation of its Budget 2012 predictions. The OBR attributed its errors on the public finances to significantly less departmental spending. On the economy, it was businesses that invested less than it expected, whilst households were broadly on track.
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