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ECONOMIC DATA ANALYSIS - US & EURO AREA DATA TAKE CENTRE STAGE
ANALYSIS FRIDAY 2 JANUARY 2015
Friday 2 January 2015
US & EURO AREA DATA TAKE CENTRE STAGE
- Euro area December
CPI expected to show prices down from a year ago
- US December nonfarm
payrolls to reinforce view that labour market is tightening
- Bank of England
expected to leave policy unchanged at January meeting
The first full
trading week of 2015 will provide plenty of economic data and news to focus
upon. Key releases include the ‘flash’ euro area CPI for December, the minutes
of the mid-December FOMC meeting and US December nonfarm payrolls. There
is also a slew of domestic data including services PMI for December and
November industrial production and construction output, as well as the MPC’s
latest policy announcement.
The ‘flash’ euro area inflation data
for December (Wed) will be a key focus in the coming week amid ongoing concerns
about deflation. The big drop in the oil price during December points to a
further fall in the inflation rate. We expect the headline CPI to show a fall
in prices of 0.1% compared with a year ago. The ECB may draw some comfort from
the fact that the ‘core’ rate of inflation (excluding food and energy) is expected
to be unchanged at 0.7%. However, that ECB President Draghi noted in a recent
press interview a growing risk of deflation suggests that further stimulus
measures remain very likely. Markets are looking at either of the next two ECB
meetings on January 22nd and March 5th as possible dates for the instigation of
sovereign QE. Any sign that ‘core’ inflation is heading lower would further
fuel such speculation. Meanwhile, political uncertainty may force the ECB’s
hand. So far, the announcement of a general election in Greece on January 15th
has had little general market impact. The yield spread between Greek and other
euro area bonds has widened but other peripheral spreads show little change.
Nevertheless, a more sizeable effect cannot be ruled out as the polling date
approaches. A marked sell-off in euro area bond markets might force the ECB to
consider early action in an attempt to boost sentiment.
In contrast, US nonfarm payrolls
data for December (Fri) are expected to reinforce expectations that policy
interest rates will start to rise sometime this year. Fed Chair Yellen’s
comments following the December FOMC meeting sent the message that the first
rate move is likely around mid-year if economic developments work out as
expected. The forecast rise in December payrolls of 240K is someway short of
the previous month’s 321k gain but would be still be close to 2014’s monthly
average. Such a rise along with a further fall in the unemployment rate to 5.7%
will likely be seen as consistent with the FOMC starting to hike at its June
meeting. The accompanying earnings data will also be scrutinised closely. While
its annual rate is still very modest the November data showed some evidence
that wage growth is starting to pick up. A further rise would be a sign that
domestic inflation pressures could build this year even if overall inflation is
depressed for now by the low oil price. Meanwhile, the minutes of the December
FOMC meeting (Wed) seem unlikely to significantly change markets’ expectations
about the course of monetary policy. However, they could provide detail on the
key indicators the FOMC are watching in considering a policy move.
The Bank of England’s January MPC meeting
(Thur) is unlikely to generate much excitement as it is almost certain that
policy will be unchanged. With the BoE at present still sticking to its minimal
post meeting statement we will have to wait until the minutes are published on
the 21st for more detail. These, however, will likely show that the MPC is
still split 7-2 in favour of leaving interest rates unchanged for now.
The November industrial production and construction data will provide
indications on the likely strength of Q4 GDP. Both fell in October and neither
seem likely to make major contributions to overall economic growth in Q4.
However, with the much larger service sector still growing at a decent pace,
GDP growth at a close to trend rate of 0.6% still seems likely.
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