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ECONOMIC DATA ANALYSIS - ECB RATE CUT ON THE CARDS
ECONOMIC DATA ANALYSIS FRIDAY 26 APRIL 2013
ECB RATE CUT ON THE CARDS
• Following recent weak data, we expect the ECB to cut the refi rate by 25bp at its next meeting
• A tapering of US QE in H2 looks less likely given the heightened economic uncertainty
• Following the UK’s firmer Q1 GDP data, focus turns to April PMIs for an early insight into Q2
It has been an encouraging week for the UK, supported by the better-than-expected 0.3% rise in Q1 GDP and the BoE's announcement that it is extending the FLS. Although substantial challenges remain, there are grounds for
optimism that the UK may finally be on the mend. The coming week’s PMIs will be watched closely to see whether the momentum continued into Q2. Away from the UK, US nonfarm payrolls and central bank policy announcements will take centre stage.
The ECB and the US FOMC give their latest policy pronouncements. Amid recent signs of economic weakness, both will be watched closely for any softening in stance. At the last ECB meeting, President Draghi indicated that the council were divided about the need for further stimulus and that upcoming developments would be "monitored closely". Since then, the message from the economic data has been unambiguous. Notably, April PMIs and business surveys point to the economic downturn weighing on the core countries of Germany and France. PMI data due in the coming week are likely to show ongoing weakness elsewhere.
Given this, a policy loosening from the ECB is, we believe, on the cards. We expect a 25bp cut in the refinancing rate; the more important deposit rate, that acts a floor to money market rates, is forecast to be left unchanged at zero.
Although it cannot be totally ruled out, we doubt the ECB would risk pushing the deposit rate into negative territory given the potential market dislocations this could cause. While admittedly a refinancing rate cut would do little to address the fragmentation of credit across the region, it should help to reduce bank funding costs (most obviously reducing the rate paid on LTROs). A 25bp cut is broadly expected and unlikely to have much market impact. At the margin, it could push the euro a little lower and cement expectations along the yield curve that rates are likely to remain low for a considerable time. More significance is likely to be attached to President Draghi's post-meeting press conference – in particular, any references he makes about the growing push back on fiscal austerity across the region, or the scope/need for additional measures to stimulate credit growth more directly. Indeed it is possible that some form of credit plan could be announced on Thursday.
Across the Atlantic, the US Fed faces a different set of circumstances. While today's GDP figures showed growth accelerated to 2.5% in Q1, this was slightly weaker than expected, with part of the improvement driven by a (temporary) inventory rebuild. More generally, there has been a noticeable slowdown in growth since early March. This could be purely due to poor weather conditions. It could, however, be an early sign that the fiscal squeeze is starting to impact. The coming week's data, headlined by nonfarm payrolls on Friday, will help inform the debate. We tend to think that poor weather played a key role in the subdued outturn last month (88k) and look for a rebound in April to 188k - broadly in line with its average over the past year. The ISM data are also released in the coming week. These too are expected to be a little stronger.
Given the heightened uncertainty in recent weeks over the economic outlook, we expect no policy change from the FOMC on Wednesday. At the last meeting, the committee discussed the merits of tapering its QE programme, with some members in favour of doing so in the second half of this year. Given the recent softening in the economy, however, we suspect the FOMC may wish to send a more equivocal message at the upcoming meeting. Nevertheless, the accompanying statement is unlikely to be materially different from the one published in March. The markets may have to await the minutes of the meeting in two weeks’ time for a clearer indication of any shift in tone.
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