In the US, economic data remain mixed. We expect the Fed to remain cautious – this has just been emphasized once again by Mrs. Yellen in her testimony -, but a slowdown of purchases in December is not to be ruled out. The first rate hike is likely in mid-2015 and our Treasury yield forecast remains unchanged. 

The ISM manufacturing and non-manufacturing index remain close to post-crisis highs, pointing to higher growth, and employment is again increasing faster (190K non-farm payrolls added per month in the mean). In contrast, consumer confidence deteriorated and leading indicators for the housing market such as pending home sales declined as a consequence of yield increases over the summer (higher mortgage rates weigh on the housing market). The unemployment rate has declined partly due to the fact that discouraged workers are no longer looking for jobs; the participation rate is now as low as in 1978.

In the Eurozone, inflation declined significantly more than expected, to 0.7%. The unemployment rate was revised upwards and the stabilization seen so far seems less certain, which is dampening wage and price developments. 
 
Inflation is especially low in peripheral countries, where the economy and the labor market are weak and wages are declining. At the same time, financing costs for SMEs and households in Italy and Spain remain high, which might be related to ongoing high financing and capital costs for banks there. Mr. Draghi said, ‘by enhancing transparency and incentive compatibility, [the banking union] will help Europe return to a situation in which investment decisions will be based on business prospects, not on geographical location’. It remains to be hoped that the AQR can improve financial fragmentation in the euro area so as to enhance growth perspectives and prevent the deflationary risks that might otherwise emerge.

Whole Report HERE