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ECONOMIC DATA ANALYSIS - ECB STIMULUS HOPES GROW
ANALYSIS THURSDAY 17 APRIL 2014
ECB STIMULUS HOPES GROW
• US recovery signals remain mixed, as Yellen
re-emphasises dovish stance
• Peripheral European bond markets surge on hopes of
ECB stimulus; PMIs watched
• Late Easter to weigh on UK retail sales, but
strong labour market data dominate
Major bond yields
little changed... The major bond
markets were broadly unchanged over the past week, impacted by mixed economic
data and light trading volumes ahead of Easter. In the UK, 10-yr gilt yields
ended the holiday-shortened week only a little higher, at 2.64%. The impact of
the much stronger than-expected labour market report (with the unemployment
rate falling to 6.9%) was broadly offset by a further fall in UK CPI
inflation (to a 4 1/2-yr low of 1.6%). Similarly, US yields were little
changed, with a fall in the Empire Manufacturing Survey broadly counterbalancing
a strong rise in US retail sales.
bonds rally on stimulus hopes... Instead, the big
movements over the past week have
been in sterling FX and peripheral Europe.
GBP/USD hit a new 5-yr high above $1.68, as the fall in UK unemployment prompted market participants to bring forward the timing of the first rise in Bank Rate. Over the week, the
Dec-15 short sterling contract fell
over 10bp. On the continent, peripheral
bond spreads plummeted by over 20bp
on growing expectations that the ECB may respond
to the strength of the euro and stubbornly
low inflation with further stimulus. ECB President Draghi is scheduled to speak in Amsterdam (Thurs). With Euro area inflation running at just 0.5%, markets will be listening closely
for any reference to the exchange
rate and policy ahead of the ECB
meeting in early May.
downside risk for German Ifo... Data wise, the
coming week sees the release of the ‘flash’ euro area and national PMIs, as
well as the German Ifo. Following the surprise weakness of the ZEW expectations
index, we expect a slight softening in the German manufacturing PMI (to 53.4
from 53.7) and Ifo (to 110.5 from 110.7). While further euro strength poses a
risk to the German manufacturing recovery, its service sector appears to be
holding up well. Strength here should be
reflected in a broader improvement in the April euro area
services PMI. Elsewhere, markets will be watching to
see whether the French
PMIs hold above 50.
US data eyed for signs of improvement... In the US, the mixed nature of recent economic data continues to
cast doubt on the extent to which the earlier weakness is purely weather
related. Creeping concerns about the pace of recovery appear to be emerging on
the Fed, with Janet Yellen emphasising the uncertainty surrounding the outlook
in a speech this week. At the same time, she stressed the likelihood that the
fed funds rate would be kept unchanged for “a considerable time” after the Fed’s
asset purchase programme ends.
Home sales still under pressure... Over the coming
week, the US calendar is restricted to second-tier releases, including the
latest leading indicator, durable goods and home sales (both existing and new).
Durable goods and new home sales will be watched for what they infer about the
strength of US Q1 GDP (due 30 April). While we expect the housing market to
recover as the weather improves, the continued decline in pending sales points
to further weakness in existing home sales in March.
UK retail sales and MPC minutes due... The Q1 GDP data are
also due out in the UK at the end of April. The coming week’s March retail
sales and public finance reports will help economists fine tune their final
growth estimates. The minutes of the April MPC meeting are also due. We suspect
these will be very similar to those in February. Next month’s, however, could
include a much wider discussion, as the fal l in the unemployment rate below 7%
means the MPC will no longer be constrained by its previousforward
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