ECB To Disappoint But By How Much?

Normally the decisions made by central banks on the first Thursday of the month are fairly dull affairs. The Bank of England haven’t moved rates since March 2009 nor added to their pile of asset purchases above the £375bn they went to in July 2012 while the ECB’s anti-inflation paranoia and European law has kept the possibility of further monetary policy easing off the table. Today we expect that status quo to be kept, despite recent data and protestations.

The prospects of movement from the Bank of England remain nil given the divergence between where unemployment in the UK sits at the moment (7.7%) and where it needs to be for a tightening of policy (7.0%). The recent good data has bolstered rate expectations in the UK but are nowhere near strong enough to prompt a temporary increase in official rates. To do so would embody the mistake of stopping a recovery in its tracks.

GBP was helped by more good news from the UK economy yesterday. UK industrial production bounced back from a decline in August to post a gain of 1.2% in September. This will have had little impact on GDP in Q3, we maintain, and believe that there will no revisions to the original 0.8% number as a result.

The ECB is also likely to hold rates today despite signs that disinflation in the Eurozone is getting close to being deflation. Inflation was shown to have sagged down to a year-on-year figure of 0.7% in October and coincides with yet larger records in unemployment and poor growth numbers. The slip in inflation will likely be pinned on the oil markets by Mario Draghi; crude has slipped dramatically in recent months as global growth has slowed and geopolitical tensions have subsided in the Middle East.

Our hope is that Draghi will fire a shot across the markets’ bows to once again show that the ECB is not a lame duck. Whether this will involve some form of rate cut, a hint at negative rates or another LTRO will remain to be seen but we would wager that anything less and the market will be disappointed. The decision to amend policy next month will coincide with new economic forecasts from the ECB on the Eurozone’s prospects. Yesterday’s data showed an economy that is still very much in trouble.

Eurozone services PMI fell from 52.2 to 51.6 in October with growth slipping in Italy, France and Germany, while Spain’s services industry remained in contractionary territory albeit at a slower rate. The composite PMI of both manufacturing and services slipped to 51.9 – consistent with growth of around 0.1% on the quarter.

Retail sales were largely negative, however, and contracted by a larger than expected 0.6% on the month versus 0.4% expected. Sales in Spain and Portugal were the major laggards month on month with falls of 2.5% and 6.2% respectively, Germany fell by 0.4% and France was flat. There may be fears for Main Street in the US as we come up to the holiday season but I would counter that these would be nothing compared to the moods in Eurozone retailing corporates.

Strong gains were seen in German factory orders as they rose 3.3% on the month. Looking into those numbers, German factory orders were lower by 1.0% domestically compared to the month before, but up 6.8% abroad and 9.7% higher within the Eurozone. Major falls were seen in a 5.1% decline in domestic auto orders in Germany in September but a 0.3% rise in foreign orders.

Our central bank webinar takes place at 2pm GMT this afternoon, during which we will outlay our beliefs on where we believe rates will be going over the coming months, and taking you behind the policy decisions that are affecting the money markets. You can still register here if you wish to attend.

Although the focus for USD on the week is tomorrow’s payrolls announcement we cannot look through today’s GDP announcement. Output improved in Q2 by 2.7% but is expected to slip to 2% in Q3 and show that momentum slowed in the US economy as we got closer to the shutdown and debt ceiling. Obviously the shutdown came within Q4’s sample period and therefore is not measurable at the moment but the market will be looking for the speed at which the economy was travelling when it hit that fiscal speed bump.

The attached PCE release, the Fed’s favoured inflation metric, will also worth looking at in the context of whether weak inflation is preventing a tightening of monetary policy by the Federal Reserve any time soon. The US data flood is released at 13.30 GMT, just as the Draghi press conference begins.