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ECONOMIC DATA ANALYSIS - MARKETS LOOK TO ECB MEETING
ANALYSIS FRIDAY 29 AUGUST 2014
Friday 29 August 2014
MARKETS LOOK TO ECB MEETING
- ECB unlikely to
start QE but could see some tweaking of policy
- US payrolls report
to show labour market continues to improve
- Other central
banks, including BoE, expected to leave policy unchanged
Market moves over
the past week have primarily been driven by geopolitical developments and
speculation around whether the ECB will ease policy again. News of fighting in
the Ukraine sent equity markets down on Thursday, although they subsequently rebounded
and ended up on the week. Bond prices, even in the US where the economic news
has largely been positive, edged higher. Meanwhile, the US dollar continued to
advance, moving below 1.32 against the euro for the first time in 11 months.
Geopolitical developments will continue to be watched closely, but the ECB
policy meeting (Thurs) will also be a focus for markets.
ECB President Draghi’s dovish speech
at the Jackson Hole symposium has fuelled speculation the ECB may be set to
announce further measures to stimulate growth. Draghi drew attention to a
market measure which showed medium-term inflation expectations have fallen
below the ECB’s 2% target. This boosted expectations that the ECB may be close
to considering some form of QE. Friday’s “flash” euro area inflation estimate
for August, which saw the core measure rise modestly to 0.9% (from 0.8% in
July), tempered some of this speculation. However, markets seem convinced that
it is only a matter of time before some further measures are announced.
The probability of significant new action
arising from the coming week’s ECB meeting is low. However, some economists are
looking for another interest rate cut. It seems unlikely that the ECB will
announce a new package before implementing the last one, although the TLTRO
programme could itself be tweaked. Otherwise, we think Draghi will confine
himself to discussing the ECB’s options, which may include further hints of QE.
The likely downgrade of the ECB’s economic forecasts may add to expectations of
In the US, the August payrolls report (Fri)
will as usual be the key release of the month. Fed Chair Yellen’s speech at
Jackson Hole indicated a shift in her view of the state of the labour market,
with an increased emphasis placed on signs of improving conditions. The latest
labour market report is unlikely to be inconsistent with this. We forecast
payrolls rose by 235k in August, close to the average monthly rise so far in
2014, while the unemployment rate is expected to fall back to 6.1% equal to its
post-recession low. Earnings growth is likely to remain subdued, but with
Yellen indicating that the Fed may not wait for wages to pick up before
starting to raise interest rates, this may now be seen as less important by
markets. Other key US data next week include the manufacturing (Tues) and
non-manufacturing (Thurs) ISMs. Given the high levels reached in July even a
modest pullback in August would still be consistent with strong Q3 GDP growth.
Construction spending (Tues) and international trade (Thurs) usually get less
attention. However, both are used to calculate GDP and so will give some
guidance on Q3 growth.
The Bank of England’s September MPC meeting
is unlikely to generate much excitement as it is almost certain that policy
will be unchanged. Admittedly, two members voted for an immediate rate increase
at the last meeting. However, while we are forecasting that policy rates will
start to rise from early next year, there is no reason to expect that the
majority view will have shifted over the past month. This week’s UK data is
unlikely to change views on the health of the economy with the August PMIs
expected to remain consistent with robust GDP growth in the second half of
2014(see back page).
There are also central bank policy meetings
in Australia, Canada, Japan and Sweden. None of these are likely to result in
immediate policy action.
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