There are only minor data releases today, with the European consumer confidence for September being the sole one of note. I therefore include some brief thoughts on two timely issues: the Federal Reserve’s decision not to taper and the German elections at the weekend.
EU September Flash Consumer Confidence (14:00 GMT): The consensus forecast sees confidence improving to minus 14.7 from minus 15.6 in August. Note that the mood in the periphery has been on a steady positive path ever since July 2012, when the European Central Bank (ECB) effectively promised to backstop sovereign debt. The Markit manufacturing purchasing manager indices are published on Monday, followed by the German Ifo index on Tuesday.
Federal Reserve presidents speak: Markets are still digesting the surprise decision by the Federal Reserve not to taper (at least for now). Remember what happened after Fed chairman Ben Bernanke first mentioned the tapering approaching back in June? During the following weeks the Fed presidents softened the message by reminding us about the conditionality of tapering and how interest rates would be kept low for an extended time irrespective of a possible tapering. How will they clarify the message now? A good guess is that the message will be similar to the previous round. That could create more USD weakness today.
There will be four simultaneous speeches from the Fed presidents (all times GMT):
16:30 Esther George (the opposing voice on quantitative easing [QE], very taper-happy)
16:40 Daniel Tarullo (speaking on regulatory issues)
16:45 Narayana Kocherlakota (strong supporter of easy monetary policy)
16:55 James Bullard (very worried about low inflation, dissented once because of his view)
On Monday William Dudley (QE-supporter) and Dennis Lockhart (has supported tapering) do their part, followed by three more speakers later during the week.
German Federal Elections (Sunday). While it is practically certain that Angela Merkel will win another term as chancellor, the actual form of the next government is still an open issue. A quick reminder: Merkel’s party is the CDU, the FDP is a conservative right-wing party and the AfD is a new eurosceptic populist party. Also, a party needs to exceed a five percent vote threshold, or its candidates will not win seats. The latest polls have seen the FDP struggling to stay above the five percent limit, while the AfD has been polled to get somewhat less than the five percent of the votes. People often lie about their voting intentions if they are supporters of anti-establishment parties. There is thus a strong chance that the AfD will exceed the five percent threshold. Even though that would not topple Merkel’s chancellorship, it would bring more visibility and a voice to the opponents of the euro, which could hinder the euro project.
There are two main scenarios:
- A classic way would be for the CDU and the FDP to form a minority government, but it is dependent on the FDP reaching the five percent-level.
- A “grand coalition” of the CDU and the SDP. The SDP is seen as more growth-oriented than the CDU, and would probably try to push for a European policy of less austerity and more burden sharing. The SDP’s support decreased dramatically the last time it formed a coalition government with the CDU, as SDP voters were disappointed that their party had betrayed them. This time around the SDP might not want to do the same mistake without getting several important concessions from the CDU. These concessions could be more helpful to the euro project than the current CDU’s undecided/austerity-prone style.