>GLOBAL MARKET MONITOR (ECONOMIC RESEARCH)

Market re-assesses recovery expectations

■ It remains far too early to implement exit strategies
US employment news fell short of expectations for improvement, but the June employment report does nothing to alter the tone at the Fed. For the market it squeezes out the premature speculation of tightening. Fed officials aired early thoughts on exit strategies in the week off after the FOMC meeting. None were as eloquent as those of San Francisco Fed President Yellen, who sees the economy turning a corner, but with the main risk of inflation being too low and not too high for several years. It remains far too early to implement exit strategies, but signs of any turn in economic activity require careful consideration on timing, mechanics and political factors.

■ Market expectations falling back in line with ours
The ECB is firmly in wait-and-see mode. It feels it has done some extraordinary things to ease the banking sectors funding problems and inject liquidity into the economy. Now with sentiment beginning to improve and activity tentatively beginning to stabilise (or at least not fall as quickly), the emphasis is on standing back and waiting to see what comes next. In the absence of any more bank failures, its hard to envisage the global economy being hit by any more large shocks. The most likely scenario is probably a long period of underperformance with the economy languishing in the doldrums for some time. It is not at all obvious that the ECB is particularly sensitive to this kind of outturn. At the very least, this suggests the ECB remaining on hold for the foreseeable future with no new innovations in policy at all this year.

To see full report: MARKET MONITOR