Friday January 16, 2015 - 17:31:09 GMT
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ECONOMIC DATA ANALYSIS - ECB TO ANNOUNCE QE, BUT WILL IT EXCEED EXPECTATIONS?
ANALYSIS FRIDAY 16 JANUARY 2015
TO ANNOUNCE QE, BUT WILL IT EXCEED EXPECTATIONS?
- ECB to
deliver QE following European Court of Justice’s ruling on OMT
attention to shift to the Greek elections as Syriza leads
in domestic wage growth to provide counterbalance to falling oil prices
Risk sentiment at a crossroads... Amid ongoing concerns over the global
inflation outlook, political tensions in the euro area and heightened currency
instability following the SNB’s surprise move, financial markets have endured
another volatile week. The current risk-off sentiment has continued, with US
and UK bond yields falling close to all-time lows. The coming week contains two
of the biggest events of the year and perhaps represents a fork in the road for
global market sentiment, with the outcome of both the ECB meeting and Greek elections
likely to dictate the direction sentiment takes from here.
to finally deliver QE...The European Court of Justice’s opinion
this week on the legality of the ECB’s OMT programme all but gave the green
light for the start of sovereign debt purchases in the euro area. Expectations
that the ECB is about to embark on a substantial stimulus package have been
further fuelled by the SNB’s surprise decision to remove the EUR/CHF 1.20 floor
on Thursday. The ECB Council meet in the coming week and we expect President
Draghi will not want to disappoint markets. Although we do not think he will
explicitly state the size of the programme or give full details of the
framework, he is likely to restate the ECB’s intention of raising the size of
its balance sheet back to its 2012 level, an increase of €1 trillion from the
current level. Allowing for the impact of the other measures already announced,
this could imply around €600bn of QE. So as not to disappoint markets,
President Draghi is likely to indicate that the balance sheet size could be
increased further if required.
Spotlight to shift to Greece... Following the ECB meeting, concerns over
the outcome of the upcoming elections in Greece (25th January) could come to
the fore. While opinion polls suggest that the populist far-left party Syriza
is in the lead, they are still unlikely to gain an outright majority which
should ease fears over a ‘Grexit’.
Euro area releases to take a back seat... Meanwhile, euro area survey data will
provide first readings on January economic activity. These include ‘flash’
manufacturing and services PMIs (Fri.) for the region as a whole, and for
France and Germany. The ZEW (Tues.) will give further updates on Germany. We
expect most of these will be up at least modestly from December, due in part to
improved sentiment in financial markets and the boost from lower oil prices.
MPC minutes to show little change... While the outlook for UK monetary policy
remains impacted by external factors, rhetoric from the MPC is unlikely to show
a significant shift in the policy debate. The January vote is likely to have
remained 7-2 in favour of no immediate change in policy. However, the minutes
may hint at emerging differences within the majority. For now, markets are
likely to remain preoccupied by the fall in oil prices and the associated
weakness of headline inflation. Emerging signs of wage growth and the recent
downward revisions to productivity, however, suggest that the medium-term risks
to inflation are not all biased to the downside. In this context, labour market
data for November (Weds.) could form the highlight of the week in the UK. We
forecast these to show a further fall in the unemployment rate and an
acceleration in earnings growth (see back page).
In a holiday-shortened week in the US, the dearth of key releases and FOMC
members entering purdah ahead of the following week’s FOMC meeting will limit
attention to second-tier housing data. Firm pick-ups in housing starts,
building permits, existing home sales and the NAHB housing index should support
expectations that the recovery in the housing market has further to go.
release of Q4 China GDP is forecast to show the slowdown in activity continued.
However, with further easing measures from the PBoC already expected, the
importance of this release is somewhat mitigated.
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