Fed to resume outright Treasury purchases

• FOMC expected to announce outright Treasury purchases in last meeting of year  
• EU Summit to focus on Single Supervisory Mechanism  
• ‘Flash’ PMIs globally to signal whether global activity has past a turning point  

Events maintain focus as year-end looms ...Financial markets will be starting to see the year end looming over the coming week, but a number of key events including Wednesday’s FOMC announcement, the EU Summit and the Japanese elections will maintain their focus.

FOMC to endorse further QE ...This week’s FOMC meeting should announce an expansion of QE as Operation Twist expires at month end. The economic indicators have been hard to read given the impact of Hurricane Sandy, but despite that some, including the non-manufactuing ISM, have been relatively firm, and jobless claims returned to their pre-Sandy levels last week. The coming week’s retail sales and industrial output figures are also likely to be distorted. Nevertheless, with the Fed committed to open-ended QE (through MBS) to support growth in an attempt to reduce the unemployment rate and continued uncertainty over the impending ‘fiscal cliff’, we expect further stimulus to be announced. A question surrounds how much the Fed is likely to buy. Twist saw $45bn/month of Treasury purchases, but with QE being balance sheet expanding as well, the Fed may not feel the need to replace all of this. Our global team forecast around $40bn/month. Chairman Bernanke’s press conference afterwards may also provide an update on the Fed's thinking over its forward guidance. Of course, the near-trm outlook for the Fed remains most dependant on the fiscal cliff and the close of the Congressional session this week provides the first soft deadline for these negotiations.

Evidence of an uptick in activity?...The coming week sees 'flash' estimates of December's PMIs. As noted, US surveys have been hard to read due to the hurricane, but others improved in November, including China's PMI, which hit a 13-month high last month, and some euro area indicators have risen from their lows. We are cautiously optimistic of further improvement this month. In China this should be driven by further infrastructure spending that suggest some acceleration in activity. China’s industrial output release earlier in the week should confirm this. Euro area indicators (including the German ZEW survey) should signal slower contraction as tail-risk fears fade, something that seems evident in recent euro area equity outperformance.

ECB victim of its own success? ... The ECB can take most of the credit in the shifting perceptions of tail risk, even before the OMT has been activated. Yet the alleviation of market pressure on euro area governments may once again result in a reneging of previous commitments. ECB’s Asmussen said this week’s Ecofin meeting “could have gone better” in preparation of the coming week’s EU Summit to finalise a blueprint for a Single Supervisory Mechanism, a cornerstone of any banking union. Germany remains resistant to the ECB overseeing the entire banking system. ECB President Draghi has upped the stakes for this week’s meeting, maintaining confidence that a deal can be done. A failure to meet this end-year timetable could cast doubt on banking union progress in 2013 and could unsettle markets.

Labour market to reflect weaker activity?...Domestically, the release calendar is light with the focus on the labour market. Last month posted the first increases in unemployment since mid-year and today's news of surprisingly weak industrial activity continues to point to a further rise. We forecast a 5k increase in claimant count unemployment in November. Moreover BoE Governer King and Chief Economist Dale speak at separate events this week. With fears of renewed softness in activity, we will be interested to see any shift in emphasis in their outlooks.

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