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Friday January 9, 2015 - 17:02:42 GMT
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  • European Court of Justice ruling on OMT awaited, as ECB QE expectations build
  • UK and US headline inflation to fall sharply, but core rates to remain broadly unchanged
  • Chinese trade data pose downside risk to oil price

Febrile market sentiment set to continue... Amid the relentless fall in oil prices and rising expectations of ECB QE, market attention in the coming week is almost certain to centre on the European Court of Justice (ECJ) OMT ruling, and US and UK CPI inflation data. With markets exceptionally febrile, we doubt the coming week’s events or data will do much, if anything, to dislodge the risk-off sentiment ahead of the key ECB meeting on 22 Jan and Greek election on the 25th.

ECJ unlikely to stand in the way of QE... Following a request from the German Constitutional Court, the ECJ gives its preliminary verdict on the legality of the ECB’s Open Market Transactions (OMT)on Wednesday. At the very least, the verdict is likely to have a key bearing on the structure of any ECB QE programme. In extremis, an outright condemnation of the legality of OMTs would call into question whether it is possible for the ECB to initiate sovereign QE at all.  Given the political and economic sensitivity of this announcement, however, we believe the ECJ will stop short of this, but focus instead on the constraints within which ECB policy should operate. In particular, it could stress that budget deficits must not be monetised; government debt cannot be mutualised; and actions should not be seen as a bail-out of governments.

ECB to announce QE this month?... Although the ECJ response risks complicating any QE announcement, we doubt it will prevent the ECB from pursuing some form of sovereign asset purchase programme over the coming weeks. Indeed, it has already been reported that ECB staff have presented the Council with a number of options. A preliminary announcement after the January 22nd ECB Council meeting now looks a distinct possibility (with the detail, perhaps, fleshed out at the subsequent meeting on 5th March). 

UK inflation data to fall sharply...Preliminary December inflation data for the euro area showed that while headline inflation fell, the core rate was more stable. We expect similar outcomes in the UK (Tues.) and US (Fri.). In the UK,  we expect headline inflation to fall to a 12 ˝ year low of just 0.6% (Consensus: 0.7%). If so, the BoE Governor will have to write the first of a series of open letters to Chancellor Osborne explaining why the MPC has missed the inflation target and what action is being taken to rectify this. The letter should provide an insight into MPC’s current thinking ahead of the February Inflation Report. We expect the Governor to stress that the fall in inflation is unlikely to be sustained over the medium term and is almost solely due to sharp falls in oil prices (which have ambiguous implications for monetary policy over the medium term. Notably, the core rate of UK inflation is forecast to tick up from 1.2% to 1.3%.

US headline and core CPI also set to diverge... Similarly in the US, the headline and core rates of inflation are also expected to diverge. We look for the headline rate to fall from 1.3% to 0.8% (Consensus: 0.7%), but the core rate to remain stable at 1.7%. Just what the Fed makes of this mix remains unclear, especially in the wake of Friday’s December labour market report, which revealed a combination of strong employment and weak wage growth. For now, we stick with our view that both the MPC and Fed will raise rates later this year.

Other significant data... US retail sales and industrial production are expected to fall back in December following strong improvements in the prior month. Nevertheless, US GDP looks set to have grown in excess of 3.5% (annualised) in Q4. November Chinese trade data will also be watched closely for their impact on oil prices. Signs of weaker imports could fuel concerns about Chinese domestic demand growth, adding to the downside pressure on crude oil.





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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