BRUSSELS Jan 26 The U.S. Federal Reserve will
take centre stage in the week ahead with a widely expected cut
to its bond-buying stimulus, responding to an improving U.S.
economy but also helping fuel a dramatic emerging market
Argentina, Turkey and Ukraine felt the full force last week
of a global flight from developing world assets as investors
grew concerned about slower growth in China and U.S. monetary
tightening, as well as the countries' own problems.
Fed policymakers are expected to confirm the tightening
trend during their Jan 28-29 meeting, notably also for being Ben
Bernanke's last as chairman before vice chair Janet Yellen takes
They are almost certain to make a second $10 billion cut to
the bank's monthly purchase of Treasuries and mortgage-backed
securities, from $75 billion now to $65 billion.
They are also likely to leave intact their delicately worded
promise to keep interest rates low, although sharply falling
unemployment has left some to doubt how long into the future
that promise will hold.
"The problem is that investors no longer believe the Fed
when we hear that proper rate tightening would happen much later
in the future," wrote Benoit Anne of Societe Generale.
"Either the Fed will manage to re-establish some credibility
on that front, and global emerging markets will probably find
some respite in the future, or we are going into a full-blown
meltdown," he continued.
Some would argue the meltdown has already begun, with
intervention proving ineffective in stemming an exit from
emerging equity funds that has totalled almost $4 billion so far
Argentina's peso suffered its largest daily loss
last Thursday since the country's 2002 financial crisis as the
central bank gave up its battle against the currency's slide
after using more than 30 percent of its reserves last year.
The Turkish lira hit a record low on Friday against
the dollar, even after the central bank spent an estimated $3
billion trying to prop it up.
Central banks believed to have intervened to defend their
currencies on Friday included India, Taiwan and Malaysia. Russia
again moved the rouble's trading band after $350 million in hard
EURO ZONE DEFLATION?
Across the Atlantic in post-crisis Europe, EU and euro zone
finance ministers meet in Brussels, although their gathering is
expected to be a monthly stock-taking rather than one with key
decisions to make.
Europe's highlight is likely to be Friday's initial estimate
for January inflation, a closely watched figure after concerns
about deflation prompted the European Central Bank to cut rates
The consensus forecast is for a rise to an annual 0.9
percent this month from 0.8 percent in December.
Germany will offer an indication with its consumer price
figures due out on Thursday, the same day U.S. gross domestic
product data for the fourth quarter of 2013 is revealed.
"I think it's going to be a week of data that's relatively
calming... U.S. GDP numbers coming in pretty strong at about 3
percent and deflation fears in the euro zone perhaps easing a
little bit," said ING senior economist James Knightley.
By contrast, Commerzbank believes the downward trend will
continue. It forecasts inflation falling to 0.6 percent in
February after 0.7 percent in January.
"Euro zone inflation is the big number of the week...
January will be an important test of our below-consensus
forecast," said chief economist Joerg Kraemer.
Finally, after a burst of credit rating reports for the past
three Fridays, the agencies will take a bit of a breather for
the next two weeks. Standard & Poor's assessment of Slovakia and
Moody's view of the two EU rescue funds are the only assessments
due out next week.
CHINESE NEW YEAR
In Asia, the Chinese also takes a break for New Year
holidays as the year of the horse takes over from the snake.
Business life closes down from Jan 31, with the official
reopening on Feb 7, but for many the real day back at work will
be Feb 10.
China's flash Markit/HSBC Purchasing Managers' Index (PMI)
fell to 49.6 in January, from December's 50.5, suggesting a mild
slowdown at the end of 2013 continued into the start of 2014.
The final manufacturing PMI for January is due on Thursday
and the official manufacturing PMI is set for release on
The latter is expected to show the same negative trend,
though the absolute numbers are higher because it polls mainly
bigger and state-owned firms who have had an easier time than
the smaller private ones that make up most of the HSBC poll.