Global weekly: Following different paths

Press release -

Central banks in Europe and the US seem to headed in opposite directions, with the ECB hinting at more stimulus and the Federal Reserve weighing the timing of a first rate hike. Bond yields rose after the Fed signalled on Wednesday that a December rate hike cannot be ruled out. Equity markets mostly moved sideways this week.

Macro update

The US economy went down a gear in the third quarter. The first estimate of GDP growth was only 1.5% in the past quarter, after growing 3.9% in the second quarter. Consumption growth remains the bright spot, with a contribution to GDP of 2.2%. Inventories represented a sharp drag, stripping 1.4 percentage points off GDP. We expect the US economy to expand in the coming quarters, but the pace is unlikely to be very strong.

We do not believe the Federal Reserve (Fed) will find much comfort in this GDP report. Fed policymakers will likely focus on the next two job reports, which would need to show a significant improvement compared with the last two reports for the Fed to feel confident enough to raise interest rates. Earlier this week, the Federal Reserve left the door open for a rate hike in the last month of 2015, by explicitly referring to the December meeting as a decision moment. Our base scenario is that the Fed will wait until next year before raising interest rates, but this week’s statement raises the chances of a December move.

In Europe, the European Central Bank (ECB) will maintain an accommodative stance, through an increase and extension of its asset purchasing programme and through rate cuts. We now expect the ECB to cut its deposit rate by 10 basis points, which would take it to -0.3%. It seems likely that the central bank will do more if necessary. This will depend crucially on the development of the euro versus the US dollar. One potential scenario is that if the Fed signals a rate hike delay to 2016, this could lead to renewed upward pressure on the euro versus the dollar, adding to the case for the ECB to cut the deposit rate by more than currently expected.