US-Fed and ECB to decide next week

Next week the US Fed's as well as the ECB's decision-making committees for monetary politics will meet. Since the ECB council already launched their monetary policy well into 2018 at their last meeting, we expect more news from the FOMC meeting.

US-Fed will raise interest rates – outlook promises to be exciting

On Wednesday, the US Fed will almost certainly raise the prime rates for the third time this year. Thereby the FOMC members' forecast as of December 2016, that expected three rate hikes for 2017, will prove true. Next week new forecasts will be released. The latest forecasts as of September showed a majority for three rate hikes for next year as well.

Will the meeting participants alter these expectations next week? This would shake the markets, but it seems unlikely in the absence of any reason. The economy continues to flourish, the unemployment rate dropped further and coevally inflation remained stable. Tax cuts have been couched in more definite terms during the last weeks. Potentially, this might have an impact on interest rate expectations of single FOMC members, but it seems unlikely, as tax cuts have already been expected for some time. Janet Yellen will certainly be asked this question at her final press conference as Fed chair. Though, all things considered we expect her not to indicate any significant changes of the central bank's course.

ECB: monetary policy persists – Inflation forecasts expected to rise

The ECB-Coucil is not expected to decide any amendments to monetary policy at the meeting next week. Anything else would be a surprise, as the monetary policy stance was determined well into 2018 only at the end of October. At that time it was decided, that the monthly securities purchases will be reduced from EUR 60 bn. to EUR 30 bn. per month starting in January 2018 and will be pursued at least until September 2018. As the Fed, the ECB will also release new forecasts next week. However, the ECB economists will focus on the most important macro variables and will make no estimates on the development of interest rates. Hence, the market will not pay as much attention to these forecasts as to those of the US Fed.

We expect that the inflation forecasts for 2018 will be revised upwards for two reasons: First, the latest forecast was based on an oil price (Brent) of USD 52.6 for 2018. The new forecast should be calculated with an oil price assumption of above USD 60, which results in a stronger price increase. The second point is probably more long-lasting. According to the European Commission's latest estimates, the Eurozone's output gap will be positive next year, which constitutes an upward revision towards the previous forecast. This means that – according to these calculations – the Eurozone economy will already exceed its potential next year.

Estimations assessing the potential may be changed again in the future, but for the time being this change exerts upwards pressure on the ECB's inflation forecast, since experience has shown that the assessment of the output gap influences the inflation forecasts. For the ECB, there would not arise any direct pressure to act from this upwards revision, but it would display an expected faster progress towards the ECB's inflation goal, which in turn could cause reaction on the government bond market.

EZ – Manufacturing PMI data for December release ahead

Next week (December 14), a first flash estimate of manufacturing Purchasing Manager Indices for the Eurozone will be released. In November, the total figure climbed to 60.1 points, the highest reading since April 2000. The upturn has taken place on a broad basis; even in Italy and France, the sentiment is far into expansionary territory. The export business is performing particularly well in all countries and, thanks to a boost of new orders, order books have risen at the fastest pace ever. Thus, the growth prospects for industry in the Eurozone over the coming months are very bright.

We expect the good sentiment in the manufacturing sector of the Eurozone to continue in December. Based on the outstanding sentiment and hard data, we expect high dynamics for the economy in the Eurozone over the next few months. In particular, investment growth should accelerate further, supported by high order books and an already high capacity utilization. For 4Q17 and 1Q18, we expect for the Eurozone a GDP growth pace of +2.6% y/y.

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