Attention switches back to economic fundamentals

• A quiet week for UK data following the Scottish referendum
• Upward revision to US Q2 GDP to provide further indication of rebound
• ECB President Draghi speaks at EU parliament following disappointing TLTRO

It has been a busy week, including a US FOMC meeting, a key ECB liquidity operation and the Scottish independence referendum, giving UK and overseas investors plenty to digest. A lot of speculation surrounded all three. In summary : the FOMC kept the language in its statement broadly unchanged; take-up of the ECB’s first TLTRO was far less than expected, but market reaction was limited; while markets breathed a sigh of relief after the victory of the ‘no’ camp in Scotland. Sterling rallied on the latter news, with GBP rising to a two-year high against the euro (above €1.28) and two-week high against the US dollar (above $1.65).

For now the domestic focus is likely to turn back to economic fundamentals and the outlook for monetary policy. In the run-up to the referendum, the market was priced for the first rise in Bank Rate occurring in the spring. Following the referendum result, however, yields at the front end pushed higher, as markets sought to discount the possibility that interest rates could rise sooner. Our central call remains that the BoE start to raise interest rates next February. With the referendum out the way, there is a risk they could move earlier - especially if the forthcoming labour market/wage data strengthen.

There is little on the domestic calendar in the coming week to contribute to the policy debate. Public finance data for August (Tues) will give a further steer on whether the borrowing requirement is likely to meet the government’s target for this year, with indications so far that this is going to be a challenge . However, it will tell us little about the cyclical state of the economy.

By contrast it is a busier week in the US, although much of the data is second tier. The third estimate of Q2 GDP (Fri) is likely to see new information on health spending boost growth to 4.8% annualised compared with the original estimate of 4%. Otherwise August durable goods orders (Weds) are forecast to post a sizeable decline (17%), although this only partly offsets the previous month’s big rise. Moreover, this volatility primarily reflects aircraft orders, and growth in other orders is more stable and positive. Meanwhile, data on both existing (Mon) and new (Weds) home sales are expected to show decent rises.

While the Fed retained its time-dependent forward guidance language on interest rates, upward revisions to FOMC members’ forecasts for policy rates over the next few years were enough to push Treasury yields and the dollar higher. The mean forecast of FOMC policymakers for fed funds at the end of next year is now 1.38%, which is well above current market expectations. It potentially means that interest rates may be raised as early as Q1 next year. It seems that 2015 is shaping up as contest between the US and UK over whose policy rates go up first.

Take up of the ECB’s first targeted longer-term refinancing operation (TLTRO) missed market expectations with just €82.6bn allotted. The general expectation is that the next allocation in December will be higher. There are also a further six TLTROs next year and the ECB’s new purchase programme for asset-backed securities and covered bonds is also due to start next month. It is still possible that these measures allow the ECB to meet its target for expanding its balance sheet by around €1trn, but this now looks very challenging. Given this, there will be strong interest in ECB President Draghi's address to the EU Parliament Committee on Monday. For most the latest disappointment signals that ECB sovereign QE is a step closer. Flash PMIs for the euro area and the German IFO will provide indications of strength of September activity. We expect them to be down modestly from August.