Monday October 31, 2005 - 11:05:00 GMT
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Lloyds TSB Financial Markets - www.lloydstsb.com/corporatemarkets
Interest rate decisions in the US and Eurozone take centre stageEconomics Weekly: Interest rate decisions in the US and Eurozone take centre stage
UK economic indicators released this week should highlight that economic growth could still pick up in the final quarter. The services PMI is expected to strengthen to 55.4 in October, signaling that this key engine of growth remains in healthy expansion territory. In contrast, however, the manufacturing PMI may contract slightly to 51.2 in October from 51.5 in September, but this still represents continuing growth for the sector, after just coming out of recession in Q3. The BBA mortgage lending data were strong last week and we expect this to be reflected in solid net mortgage lending and approvals figures released by the BoE on Monday. The Nationwide house price survey may also show that in monthly terms the market is stabilising, though the annual rate will clearly remain weak. The CBI distributive trades survey data will give us a first view of how retail sales fared in October, however, it has been noticably out of line with the official numbers of late, but is expected to have improved from -24 in September to -20. Consumer confidence, however, could have weakened further from the 11- month low of -5 in September to -6 in October.
For the US, attention will be clearly focused on the Fed FOMC interest rate decision on Tuesday, with investors overwhelmingly expecting short-term interest rates to rise by a further 25bp to 4% from 3.75%. It is therefore the accompanying statement that will again take most of the attention as investors disect it to glean any further clues about likely policy ahead. The language will remain one of its key features and whether the terms 'accommodative' and 'measured' will remain. Markets are fully pricing in, that is expecting, a 25bp rise in November and December and the probability of a further rise in January (Greenspan's final meeting as Chairman) continues to rise. The Fed's favourite measure of inflation, the core PCE deflator, is released later today and although it could slip back to 1.9% in September from 2.0% in August, it is likely to have little weight as regarding forthcoming interest rate decisions just yet, as policymakers look ahead to 2006. The ISM indices will be closely watched this week to help judge the pace of activity moving into the final quarter of the year, especially coming on the back of the robust gdp numbers seen last week for Q3. However, with the October US payrolls report also released at the end of the week, the employment indicies will also elicit extra attention. Our forecast shows a rise in the ISM services index to 55.0 in October but a weaker ISM manufacturing index to 58.0 in October from a surprisingly strong 59.4 in September. Non-farm payroll data will be released on Friday and we expect 110,000 new jobs to have been created in October, up from the surprisingly weak fall of 35,000 in September. However, this number is likely to remain difficult to forecast with any real confidence in the coming months, at least until the effects of the hurricanes become more fully absorbed.
In the eurozone, the ECB is forecast to keep interest rates on hold at 2% for a straight 28th month on Thursday. However expectations of a possible rise this year have been growing and the chance of a 25bp rise by the end of the year is seen as just over 60% according to financial markets. We still believe interest rates will remain on hold until Q2 2006, however. Given the recent slew of hawkish comments from ECB members, the press conference will make interesting listening and should offer further clues. The manufacturing and services PMIs for the eurozone and associated countries will also be released this week, we expect a generally stronger set of numbers, following on from the positive sentiment presented in last week's data.
Jeavon Lolay, Senior Economist
Rabia Bhopal, Junior Economist
Lloyds TSB Bank,
London EC3R 8BQ
0207 283 - 1000
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