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Although today is absent of any key data releases this does not mean that it will be a quiet week for markets in the lead up to Christmas. Following yesterday’s Japanese elections markets will be digesting what this could mean for future monetary policy and the Bank of Japan’s role.

In the lead up the opposition leader Mr Shinzo Abe was critical of the Bank of Japan’s cautious approach to boosting economic growth and its failure to solve the problem of deflation, demanding that the BoJ accept a 2% inflatioin target set by the government , double the central bank’s 1% target.

Its a busy week for UK data. We forecast a modest rise in CPI inflation to 2.8%, as utility tariff hikes start to be included. Coupled with higher food price, inflation is forecast to rise to around 3% over the next six months. We expect November’s retail sales to rise modestly by 0.3% following October’s drop, but the trend on the high street looks set to remain soft in the run up to Christmas.

Moreover, the final estimate of GDP could see a modest downward revision in Q3 growth to 0.9% from 1.0%, reflecting weaker growth in industrial activity. In combination, this suggests a soft end to 2012 and we will watch Wednesday’s MPC minutes to see what influence this had on the Committee’s thinking in December. We expect a slow start to next year, but forecast gradual acceleration to deliver 1% growth for 2013 as a whole.

Meanwhile the upcoming US ‘fiscal cliff’ will continue to weigh on markets. With the deadline rapidly approaching we will watch for discussions of contingency measures that can stall the impact of the cliff into next year. In reality a more measured solution looks destined to fall into January, leaving markets increasingly edgy about the impact on the economy – particularly as the debt ceiling limit will also be approaching fast at this point.

Indeed, this impact is becoming more evident already. Declines in consumer confidence and the NFIB small business survey suggest increasing evidence of cliff uncertainty. Reflecting these worries we expect Empire State manufacturing survey remained in negative territory (-2) in December.

To view the full report from Lloyds Bank click here.

December 17, 2012
From Lloyds Bank