Saturday, May 2, 2009

BoE and ECB Unlikely to Echo the Fed's Less Pessimistic Tone on Outlook

This week the Bank of England and the ECB meet, both on Thursday, to set interest rates and other monetary policy measures and to discuss their respective economies. Will their comments echo the US Fed's less pessimistic outlook? Although recent economic survey data suggest that both economies may be starting to bottom out, they still point to economic contraction for now. In terms of the interest rate decisions, we expect the BoE to keep interest rates on hold at 0.5% and the ECB to cut rates by 0.25% to 1%, as it is still behind the UK and the US. The ECB may also introduce additional monetary easing measures- although outright purchases of government bonds are unlikely, the ECB could buy commercial bills. In addition, the US government plans to release the outcome of its regulatory stress testing of 19 top US banks and it also has a heavy schedule of issuing over $71bn of US treasury bonds. The Bank of Japan publishes the minutes of its 6/7 April meeting and the Australian central bank is likely to hold interest rates at the current level of 3%. UK & US financial markets are closed on Monday.

UK economic data due this week include the UK services PMI index and producer prices for April. The PMI manufacturing index published last Friday surpassed market expectations at 42.9, the highest level in eight months. But although the trend is in the right direction, the figure is still indicative of output contraction. What is possible, however, is that the decline in manufacturing in Q2 may be less severe than the very sharp contraction of 6.2% reported in Q1. With this in mind, financial markets will be looking to see whether or not the recent improvement in the services PMI index is also maintained. Already we have four months of improvement from November's low of 40.1. The market consensus forecast is for an increase in the index from 45.5 in March to 46.3 in April. Monthly producer input price inflation may have slowed from 1% in March to 0.7% in April - this represents an annual fall of 3.6% compared with one of just 0.4% in March. Producer output price growth may stay at 0.1% on a monthly basis as food prices are higher - 0.8% growth compared with 2% a month earlier, on an annual basis.

The US has a heavy economic calendar including the ISM service survey index on Tuesday and the key jobs report for April on Friday. In line with the trend in the UK and the EU-16 manufacturing PMI surveys, the US ISM equivalent measure strengthened again in April. In turn, the market consensus forecast is for a rise in the service index from 40.8 in March to 42.0 in April. This will be the fifth consecutive increase from a low of 37.4 last November. Also published, consumer credit for March may decrease by $5bn, less than the $7.5bn fall in February and underpinned by the strengthening in the US consumer confidence index to 39.1 in April, off the low of 25.3 in February. But the key data for the week is the US jobs report and non-farm payrolls number - we expect another sharp drop in jobs of 610,000 in April slightly better than the 663,000 fall in March. In addition, the unemployment rate is likely to rise further from 8.5% in February to a 25-year high of 8.9% in March. We will be looking for convergence between improving consumer & business confidence and the unemployment rate in coming months, but for now the two indicators are sharply diverging with unemployment accelerating as a share of the workforce.

The ECB meeting is crucially important this week as it may signal the end of its series of interest rate cuts if its view of the region's economic health has improved on the back of recent survey results. All will depend on the depth of members' concerns about the sharp rise in the unemployment rate and the risk of deflation as annual CPI inflation could fall below 0.5% in May and reach zero in the next few months. It is possible that the recent strength of the euro and its negative impact on exports and output may lead to the announcement of further monetary easing measures. In terms of data, EU-16 retail sales for March will help inform of conditions in the high street - we expect 0.2% growth in sales. The EU-16 consumer confidence index published last week showed a small improvement in April, but still a very weak number. German factory orders may have contracted by 1.5% in March (a fall of 3.5% in February), 36.5% on an annual basis.

Lloyds TSB Bank

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