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Friday January 9, 2015 - 17:02:42 GMT
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ECONOMIC DATA ANALYSIS - EUROPEAN COURT RULING UNLIKELY TO STAND IN THE

ECONOMIC DATA ANALYSIS  FRIDAY 9 JANUARY 2015

EUROPEAN COURT RULING UNLIKELY TO STAND IN THE
WAY OF QE

  • 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.

 

 

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