What is next in Mario Draghi's war chest to combat inflation ... Poison chalice anyone?

Week commencing Monday 3rd March 2014


This week in Short



  • In the UK we await the results from the latest PMI round. We expect mixed results with manufacturing having the greatest potential to wow market participants. We also await Mark Carney’s MPC statement on Thursday which should stoke up some volatility of GBP crosses.

  • In the US we have a busy week with the all-important non-farm payroll number set to be released on Friday. We expect a decent uptick in this figure, albeit not enough to reduce the headline rate of unemployment down to 6.5%.

  • In Europe we have a swath of member state PMI releases in addition to Mario Draghi’s monthly ECB press conference. It will be interesting to see how Mario Draghi attempts to combat the incredibly low inflation rate, especially as dropping rates had such a limited impact. Any discussions on negative rates and/or LTRO’s will likely cause significant volatility on EUR pairs.


Overriding Market Themes


We start with UK Retail Sales, which fell in February as the wettest winter since 1766 kept consumers away from the shops. Like-for-like sales fell 0.9 percent compared with last year, according to the report. Fashion sales declined 3.3 percent year-on-year with a number of retailers holding back their new spring ranges owning to the weather. Sales of home wares bucked the trend and rose 9.8 percent. The data includes sales from about 85 companies with about 10,000 outlets nationwide. The question economists are asking themselves is, was this retail sales dip merely on the back of the weather or is there something more interesting at play? One this is certain, spending power remains under considerable pressure and the economy really needs a pickup in real wages in order to give the consumer a second wind for the second half of 2014.


Across now to India, where the economic growth rate slowed down in the most recent quarter, holding well below the benchmark 5 percent figure and denting the Congress party’s chances of extending its decade long rule in May’s national elections. The economy expanded at an annual rate of 4.7% in the three months to December, down from 4.8% in the previous quarter. The figure was lower than analysts had been expecting and is the fifth quarter in a row that India has posted sub-5 percent growth numbers. A deceleration in agricultural growth was a key factor in the overall slowdown in GDP in the quarter, with a mere 3.6 percent increase in output compared to market expectations of well over 5 percent.


Finally moving back to Europe, The European Commission has said economic recovery is "gaining ground" in the EU as it revised up its growth forecasts for 2014 and 2015. The Commission said the Eurozone would grow by 1.2% this year and 1.8% next year, 0.1 percent higher than their previous estimations last year. They also upgraded the UK’s economic outlook, with expectations for UK growth this year have increased from 2.2% to 2.5%, while the forecast for 2015 remains at 2.4%. The wider 28-nation EU's prospects have been revised up by 0.1 percentage points, to 1.5% in 2014 and 2% in 2015. The Commission's upgrades follow a similar upward revision by the International Monetary Fund and many credit rating agencies.


GBP This Week


We have an important week ahead for the UK with the usual start of the month PMI releases to look forward to. The first of the PMI figures to be released will be the manufacturing PMI survey, due for release early on Monday. We have recently seen this figure, along with services suffering somewhat of a comedown during the beginning of 2014, following a very strong and positive second half of 2013. Market expectations for this indicator remain mixed, and it is this unpredictability which can bring a response in the markets should we see a strong swing either way. We expect to see a slight uptick in the figure from its previous 56.7 print, possibly to 56.9 to 57.0.


Moving to Tuesday we await the release of the construction PMI figure, another interesting statistic when put into the context of the availability of credit and increased optimism. This indicator started strongly this year, however the previous result disappointed markets somewhat. This has pushed market expectations to seek a slightly more pessimistic 63.6 this month following 64.6 last month. It is worth mentioning that this tends to be the least volatile of the three PMI releases owing to its size and impact to the overall UK economy. With this in mind and with expectations so heavily entrenched above 60, we expect little in the way of market movements on the back to this release.


Moving to the crowning jewel of PMI released, we await the result of the latest services PMI release of Wednesday. Market expectations point towards a pullback to 58.0 from 58.3 last month. Should this occur, it would not prove totally detrimental to growth moving forward, unless we saw something really sizable. Given that services are the core driver of GDP growth in the UK, any upswing in this number would be seen as highly beneficial to the economy and job prospects going forward, and certainly boost Sterling across the board.


Finally we await the Bank of England’s monetary policy committee’s latest decision with respect to the headline interest rate and asset purchase facility. As per usual, under Mark Carney’s forward guidance model this is unlikely to attract to much volatility as both these levels are expected to remain flat. The accompanying statement however is a different story and any change or update to the guidance moving forward would certainly cause market sentiment to shift. We doubt this would happen, especially as Mark Carney adapted his forward guidance model last month.


USD This Week


We have a very busy week for US data with Wednesday’s ADP non-farm payroll numbers starting the ball rolling, which we hope should give us a better idea of what the more notable payroll figures on Friday will look like. This month the market forecasts point towards a figure close to 153k, following a strong 175k reading last month. We suspect that an over/undershoot of around 15-20k jobs would be enough to take the attention of the markets and stoke up some increased volatility.


We then move our attention to the ISM manufacturing and non-manufacturing PMI figures, of which we will probably be following the manufacturing PMI more closely as it is widely expected to rebound significantly from its sharp declines last month. This was widely attributed to the poor weather conditions which saw some very large manufacturers (think autos etc.) fail to both produce and distribute at the same rates. With pre-2014 levels pushing around the 57.0 mark in contrast to the pathetic 51.3 posting in January, we expect something pushing at least 52.5 this month.


Later on in the week we await the unemployment rate, which is always seen as a key indicator for the FOMC when deciding on any additional asset purchase tapering. Markets appear to be obsessed with a 6.5% threshold as a key driver for potential interest rate hikes, however with Yellen recently citing the 6.5% level as obsolete we really await further guidance from Janet Yellen as to which indicators we should watch out for. That said, we doubt that enough jobs have been created to push the rate down 1 pp from its current level of 6.6%.


Also set to be released on Friday is this week’s highlight in the form of non-farm payrolls. This typically brings about the most volatility in the first week of the month, and with this month’s expectations pointing towards a rise to 160k following a weak figure of 113k last month, we expect some considerable risk on trading on the back of it.


EUR This Week


We have a somewhat quieter week for Europe ahead, with the release of various PMI figures for member states at the beginning to the European Central Bank’s interest rate decision on Thursday. Starting with the PMI’s, we doubt that any sizable market movements will be derived from any PMI this week, as most seem to be almost foregone conclusions. France remains in the spotlight and it would certainly enhance the Euro’s chanced to gain continued ground against the US Dollar and Sterling if we could see the zones second biggest economy blast out of recession. German figures always make a good read and are expected to continue to show sizable expansion in all sectors.


The main event of the week will be the ECB interest rate decision and accompanying speech from Mario Draghi. The headline rate of interest is unlikely to change, especially given its limited impact on inflation following the previous rate cut. With no cut forecast we look forward to see what Draghi has to say for himself, especially when the current inflation rate remains such a concern. There is some potential of him signalling the use of possible alternative measures to combat inflation, including LTRO’s, negative interest rates or potentially European wide asset purchases. This should be a very interesting watch therefore. 

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