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Sunday June 1, 2014 - 21:45:06 GMT
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  • 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 likely.    

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. 

UK 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.





This document, its contents and any related communication (altogether, the 'Communication') does not constitute or form part of any offer to sell or an invitation to subscribe for, hold or purchase any securities or any other investment. This Communication shall not form the basis of or be relied on in connection with any contract or commitment whatsoever. This Communication is not intended to form, and should not form, the basis of any investment decision. This Communication is not and should not be treated as investment research, a research recommendation, an opinion or advice. Recipients should conduct their own independent enquiries and obtain their own professional legal, regulatory, tax or accounting advice as appropriate. Any transaction which a recipient of this Communication may subsequently enter into may only be on the basis of such enquiries and advice, and that recipient’s own knowledge and experience. This Communication has been prepared by, and is subject to the copyright of, Lloyds. This Communication may not, in whole or in part, be reproduced, transmitted, stored in a retrieval system or translated in any other language in any form, by any means without the prior written consent of Lloyds. This Communication is provided for information purposes only, and is confidential and may not be referred to, disclosed, reproduced or redistributed, in whole or in part, to any other person. This Communication is based on current public information.


 Whilst Lloyds TSB ank plc (“Lloyds TSB”) and Bank of Scotland plc ("Bank of Scotland") have exercised reasonable care in preparing this material and any views or information expressed or presented are based on sources it believes to be accurate and reliable, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of the facts and data contained herein.


This material has been prepared for information purposes only and Lloyds TSB, Bank of Scotland, their directors, officers and employees are not responsible for any consequences arising from any reliance upon such information. Under no circumstances should this material be treated as an offer or solicitation to offer, to buy or sell any product or enter into any transaction. If you receive information from us which is inconsistent with other information which you have received from us, you should refer this to your Lloyds TSB or Bank of Scotland Relationship Manager for clarification.


Lloyds Bank Corporate Markets, Lloyds TSB Corporate Markets and Lloyds TSB are trading names of Lloyds TSB Bank plc, Lloyds TSB Scotland plc and Bank of Scotland plc. Lloyds TSB Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Lloyds TSB Scotland plc. Registered Office: Henry Duncan House, 120 George Street, Edinburgh EH2 4LH. Registered in Scotland no. 95237. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC32700. Authorised and regulated by the Financial Services Authority under registration numbers 119278, 191240 and 169628 respectively.




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