Global economy on a firmer footing awaiting US Federal Reserve

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The US economy is far from firing on all cylinders. (Reuters) The US economy is far from firing on all cylinders. (Reuters)
SummaryMore bricks in recovery wall will likely slot into place when Fed start unwinding its stimulus.

measure, the core deflator for personal consumption expenditure, remained stuck last month near June's uncomfortably low annual rate of 1.2 percent.

And financial conditions have tightened since the Fed met in July, with mortgage rates yanked higher by rising bond yields.

But Jerry Webman, chief economist with OppenheimerFunds, said the Fed had talked itself into a position where it would arouse suspicions if it did not start buying fewer bonds in September, say $75 billion a month instead of $85 billion.

"At the moment, expect tapering to begin in the middle of September; don't expect it to be terribly disruptive to financial markets," New York-based Webman said.

JAPAN AND GERMANY LOOKING UP

Statistics this week from developed economies should partly allay another concern voiced in the Fed minutes - that America's export markets were sluggish.

Japan, responding to aggressive monetary stimulus and a weaker yen, is forecast to report a rebound in industrial output and household spending alongside an acceleration in consumer price inflation - just as the Bank of Japan wishes.

In Germany, economists are pencilling in a rise in the IFO business climate index for August to 107.0 from 106.2 as well as a solid rise in retail sales and a dip in the number of jobless.

After data on Friday showed Germany's 0.7 percent rise in second-quarter GDP was driven by domestic demand, including a rebound in business spending, Thomas Harjes with Barclays in Frankfurt said he expected Europe's largest economy to maintain its underlying 2 percent annualised growth rate through 2014.

"Corporate capital investment should continue a moderate recovery unless the euro area crisis intensifies again, or global demand, especially from China, is significantly weaker than expected," Harjes said in a note.

The data flow from China has in fact improved lately, and economists expect a modest rise in the official manufacturing purchasing managers' index, due on September 1, to 50.5 from 50.3.

That would be welcome news to China's emerging-market trading partners. The currencies of India, Brazil and Indonesia among others have tumbled due to growth worries and a looming end to ever more cheap dollars printed by the Fed - opening up a negative feedback

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