Sunday, July 5, 2009

Weekly Economic Data Preview : ECB and US Non-Farm Payrolls to Set the Tone

Markets will be watching this week's economic releases closely for signs that a nascent recovery is taking hold. After last week's relatively light economic calendar, the pace picks up with a number of key releases and events, culminating in the ECB council meeting and the US Employment Report on Thursday. Before then, various forward-looking business surveys are due for release, along with Eurozone inflation and money supply figures, and the US consumer confidence report. Over the past week, testimony by members of the UK Monetary Policy Committee and the statement accompanying the latest US FOMC meeting strongly suggest that US and UK policy makers are in no hurry to change policy course. It's the turn of the ECB to provide guidance this week. We expect the refinancing rate to be left unchanged at 1.0% at Thursday's council meeting, with last week's €442bn 1-year liquidity injection likely to be viewed by the policy-setting council as providing enough new policy stimuli for now. We expect the general tone of this week's US data to be cautiously upbeat although, as always, the payroll out-turn is a wild card. In May, nonfarm payrolls dropped by 345k – the smallest decline since September 2008. While the rate of decline in employment should steadily slow as the downturn in the US economy eases, we believe the persistent high level of jobless claims point to a payroll drop of around 400k in June. The unemployment rate is forecast to rise to 9.6%, putting it on course to hit double figures by the autumn.
The data calendar in the UK remains relatively light this week, although the UK PMIs and Bank of England Credit Conditions survey are likely to attract interest. Over recent months, the manufacturing and service sector PMIs have steadily improved, suggesting that the UK inventory downturn and the associated drops in output and orders are beginning to ease. We expect a further modest improvement in both surveys in June. Given the recent improvement in credit markets, the pick-up in mortgage approvals and the gradual response to QE, the BoE's Credit Conditions survey is expected to show that access to credit has continued to improve, albeit from still exceptionally tight levels. Also in the UK, focus will be on demand and supply in the gilt market. The DMO is due to auction a record £5.25bn of long-dated gilts, while the BoE will be purchasing a further £6.5bn of gilts, under its Asset Purchase Facility. The BoE is committed to buying £125bn of assets under the APF by the end of July. This week's purchases will take the running total to £102.5bn. Also due this week are the Nationwide house price release, net consumer credit, final GDP and current account data.
Although the payroll report dominates this week's US releases, the consumer confidence, Chicago PMI and ISM reports also have the capacity to shift market sentiment. Overall, we expect the tone of this week's US consumer and business surveys to be cautiously upbeat. The recent strength in US durable goods orders suggests US capital equipment spending is starting to turn, supported by the weaker dollar and recent government stimulus. Still, with the unemployment rate likely to breach 10% by the end of the summer and the household sector deleveraging rapidly, there remain significant obstacles to a sustainable recovery. We expect the ISM to rise from 42.8 to 43.5 in June, with the orders index moving further above 50 after breaching this level for the first time in seventeen months in May. The employment component of the ISM, by contrast, remains well below 50, remaining at 36 in May. The employment component of the ISM will be watched closely as a leading indicator ahead of Thursday's payroll report.
With the ECB widely expected to keep rates unchanged at this week's council meeting, focus will be on the tone of President Trichet's comments in the accompanying press conference. Although the Eurozone has lagged the improvement in the US and the UK, there have been signs that the pace of decline across most EU-16 countries is gradually easing. Still, as this week's inflation figures are likely to highlight, the Eurozone has entered deflation (alongside the US). Based on the regional figures, the headline EU-16 CPI inflation rate is forecast to have dropped from zero percent in May to -0.2% in June, driven lower by the fall in energy prices. Moreover, German unemployment and Eurozone business confidence figures due this week are likely to show that conditions remain extremely weak. While Eurozone money supply growth is picking up as a result of the extreme monetary stimulus that has been imparted, it is far too early for President Trichet to rule out the possibility of further easing (either interest rate cuts or QE) in the months ahead.

Lloyds TSB Bank
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