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ECONOMIC DATA ANALYSIS - ECB TO DELIVER FURTHER STIMULUS
ANALYSIS FRIDAY 30 MAY 2014
ECB TO DELIVER FURTHER STIMULUS
- Markets await scale
of ECB stimulus against a subdued inflation background
- US data to suggest
strong rebound in Q2 activity
- Bank of England to
stand pat amid more mixed data
ECB poised to act... At the press conference
following the May ECB meeting, President Draghi hinted strongly that the ECB
was primed to loosen policy in June, although he stopped short of
pre-committing, deferring any decision until after the publication of the
latest staff economic projections. Since then, market participants have been
widely speculating over the likely outcome, with comments from various Council
members providing only limited insight into possible measures. The coming
week’s Council meeting will end this speculation. We expect the ECB to announce
a range of policy measures, headlined by a 15bps cut in the refi rate to 0.10%,
with broadly similar cuts expected in both the marginal lending and deposit
rates, pushing the latter into negative territory. This may be supplemented by
additional liquidity measures, the most likely options are: an extension of the
fixed rate full allotment policy; non-sterilisation of the SMP programme;
and/or a ‘targeted’ longer-dated LTRO. Although there has been some talk of an
ABS purchase programme or even outright QE, we think these are less
Weak euro area inflation... In
the run up to the ECB meeting, the preliminary reading of May euro area
inflation (Tues) is expected to post its eight consecutive sub 1% outturn.
Subdued readings from Spain, Italy and Belgium this week, are expected to be
mirrored in the German estimate (Mon), with the aggregate euro area reading
forecast to be unchanged at 0.7%. While this is unlikely to significantly alter
the mindset of the ECB Council ahead of Thursday, it should serve to underscore
the pressing need for further stimulus.
policy debate more balanced... The MPC also delivers its latest
policy verdict on Thursday with the Committee set to keep Bank Rate and the
size of the APF unchanged. However, comments over the past week from Martin
Weale reiterated his hawkish bias. Nevertheless, with changes in the composition
of the Committee set to impact from June, he is likely to remain in the
minority for some time. The coming week’s data are expected to highlight that
the domestic growth outlook remains upbeat, with the PMIs expected to point to
continued robust expansion, albeit softer than the previous month.
US GDP to rebound in Q2.... The
big news in the US over the past week was the downward revision to Q1 GDP
growth to a fall of 1% annualised - the first quarterly decline for three
years. However, as this was mostly due to less inventory accumulation, it
increases the potential for a strong rebound in Q2. With final demand also
expected to bounce back strongly after being depressed by exceptionally cold
weather in Q1, we expect GDP growth of 4% annualised in the current quarter.
Strong payrolls number expected for May...
The coming week will see the first of the important US economic indicators for
May, culminating in the employment report on Friday. We forecast payrolls to
show a gain of 215k, which would be the fourth consecutive monthly rise in
excess of 200k. Employment growth so far this year has been quicker than in
2013, suggesting the GDP data may be underestimating activity. Markets will
also closely watch other parts of the labour market report - in particular the
unemployment rate, which we expect to remain steady at a recovery low of 6.3%,
and average earnings growth, which should accelerate modestly. Earlier in the
week the ISM manufacturing (Mon) and non-manufacturing (Weds) surveys for May
should signal a further acceleration following their April gains.
And finally... The Chinese PMI
for May is expected to provide signs of stabilisation following a recent
slowdown in manufacturing activity.
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