Growth remains on track for a stronger 2014

The OECD leading indicators suggest that if in the absence of shocks from bad policy, global activity should be pretty good in the next 12 months.

The last couple of years have been marred by policy decisions that were seen as poor at the time or in hindsight were not aggressive enough. Perhaps policy makers have learnt their lessons, but it still pays to be wary, even looking beyond the immediate risk from the turmoil created by the US approaching the debt ceiling.

The leading indicator of the OECD continues to improve, although the pace of improvement has slowed a bit from earlier in the year.  This is not overly surprising given indicators in the Euro Area were coming from below-trend growth, so the fact that some momentum has been maintained is a good thing.

It's also a good thing that the ECB and the Fed are now more dovish than there were back in 2011 when leading indictors were at these levels.  It is incredible to think that the ECB actually raised rates in 2011 and the Fed was openly communicating exit strategies from QE.

The risks from fiscal austerity undermining growth also seem to have lessened given how aggressively it has been pursued in Europe and the US, with there greater (although not overwhelming) acknowledgement that this was a mistake.

Strength in the OECD in 2014 will have important spillovers to emerging economies in Asia.  In particular, trade should be a much better contributor to GDP in Asia after being a heavy weight this year.

This return of strength to the external sector in China could be very important to the composition of growth next year.  It should be easier for policymakers to hit GDP targets without relying on credit-driven infrastructure growth which is creating financial risks that clearly concerns them.  This could be a challenge for many commodity markets.

The leading indicators for emerging markets remain weak, with the OECD + 6 index only turning up somewhat in the last month or so.

This indicator is less reliable than the OECD indicators, partly because the index for China doesn't appear to work nearly as well as for other countries.

At face value, the index tracks industrial production (which this index is still designed to do rather than GDP), but the whole point is for it to lead activity.  If anything, the trend in IP is leading the leading indicator.

Other emerging economies are not fairing so well. In particular, the crisis in India is becoming more acute, while Brazil continues to stuck in slow growth.

The situation appears to look more dire for India than it does Brazil.  There is currently no signs of a bottom in expectations for the slide in growth in India, with inflation forecasts also remaining uncomfortably strong if you were at the helm of the RBI.

Forecasts for Brazilian GDP, however, have started to look a bit more stable.

This relative improvement is clear in FX markets.  Both the Brazilian Real and the Indian Rupee became highly correlated with 10 year Treasuries back in May, as rising yields lead to an escape from emerging markets.

But since September, when the Fed held back on tapering, the Real has outperformed, with the Rupee still drifting with Treasuries.

This is perhaps a big problem for the RBI, as despite all their efforts to stabilise the currency and inflation, direction is being dictated by forces beyond their control rather than by their efforts.