Eurozone: Publication of results of comprehensive assessment

US: FOMC - managing interest rate expectations in an environment of fragile markets

markets Eurozone: Publication of results of comprehensive assessment

Germany: PMI index surprises on the upside

FOMC meeting in a difficult environment

Wednesday’s FOMC meeting will be the most important event for capital markets next week. We do not expect any significant change to the monetary stance. The end of securities purchases will be announced, but this has already been communicated for a long time. The crucial factor will be that no new hints concerning the end of the zero interest rate policy should be formulated. Rather, the vague formulation of the previous meetings, leaving ‘considerable time’ between the end of asset purchases and the first rate hike, should be kept. Since the last FOMC meeting, incoming data has shown ongoing improvement of the labor market and the unemployment rate reached a post-Lehman-low. Other indicators generally confirmed as well the ongoing expansion of the US economy. However, the FOMC will shy away from triggering a significant change of interest rate expectations, due to the current fragile status of capital markets. Markets gave (too) great attention to statements in the minutes of the previous FOMC meeting voicing concerns about the effects of economic weakness of important trading partners on the US economy. This triggered a significant decline of interest rate expectations. We think that this was not intended by the FOMC. So, the upcoming statement after the meeting could contain a clearer assessment of the economy, with the intention to slowly move interest rate expectations away from the current very low levels. In total, the outcome of the meeting is quite uncertain, as it is hard to predict how the committee will set the priorities between guiding interest rate expectations and keeping capital markets calm.

ECB to publish results of comprehensive assessment

On Sunday at 12:00, the ECB is due to publish the results of the comprehensive assessment of the Eurozone’s major banks. The ECB will then take over the ongoing supervision of these banks (around 130 institutions). Even though, the markets could react with increased volatility immediately after the publication of the results, we expect that the finalization of the assessment will strengthen general trust in the Eurozone’s banking sector. Corporates should benefit from an easing of access to financing. We expect this to deliver positive impulses for Eurozone investments in 2015.

Will Germany be able to deliver a positive turnaround in 4Q?

In the course of the publication of industry PMI flash estimates for October, Germany delivered a positive surprise. For the first time in several months, the poll data managed to improve and currently indicates slight growth for Germany’s industry production in 4Q14. It remains to be seen whether the release of Ifo data (October 27) next week will confirm this positive trend. France, however, continues to disappoint and survey data points towards further decline of industry production in 4Q. The current discussions regarding France’s budget draft for 2015 with the European Commission are also contributing to the current uncertainty. Flash industry PMI data for the entire Eurozone currently indicates stagnation of Eurozone industry production in 4Q. Weak order intake and declining order books in October point towards prolonged economic stagnation in the coming months. This data confirms our unchanged economic view (stagnation of the Eurozone economy in 2H14). In 2015, we expect that the finalization of the comprehensive assessment of banks, targeted measures from the ECB (TLTRO) and the weakness of the euro should support the Eurozone economy.