Monday, November 30, 2009

Will Trichet Signal the Beginning of the End for the ECB's Extraordinary Policy Measures?

Weekly Economic Data Preview  

The ECB press conference will attract more attention than usual this week, with financial markets waiting to see whether President Trichet confirms that the central bank is to cease its 12m Long-term Refinancing Operations after December. If so, the move will be interpreted as being the first step by the ECB in unwinding its unconventional policy measures. Meanwhile, in the UK, there has been a divergence of views on the MPC on the appropriateness of the most recent QE extension. MPC member Posen (who voted with the majority to extend the BoE's Asset Purchase Facility by £25bn) speaks on Tuesday, while Chief Economist Dale (who voted against a further extension to the APF) speaks the following day. On the data front, there are a flurry of purchasing managers' surveys released this week across the globe. Moves in the employment balances within the US reports and Wednesday's ADP reading are precursors to Friday's US labour market data. Here, we expect non-farm payrolls to decline by 160k in November and the unemployment rate to stay unchanged at its 26-year high of 10.2%. Until the unemployment rate shows a sustained downward trend, the Fed is not likely to raise interest rates. On Wednesday, the Fed's Beige book is likely to characterise the gradual recovery in the US.

In the UK, we expect both the manufacturing and services PMIs to post small declines to 53.3 and to 56.5, though clearly the readings are well above the fifty level, signifying expansion. As a consequence, we expect the level of the composite PMI recorded to date during Q4 to corroborate our expectation that the economy will exit recession in the current quarter - chart a. There are a number of housing releases to watch out for too. Lending to individuals data for October are released on Monday, as is the November Nationwide house price index. The Halifax also releases its house price index during the week. As for policy maker rhetoric, the MPC's Posen (who voted for the MPC's £25bn extension to the APF) speaks on Tuesday, while Chief Economist Dale (who voted against the extension) speaks the following day.

In the US, we forecast a small decline in the manufacturing ISM (Tuesday) to 54.8 in November from its three-and-a-half year high of 55.7, and a small rise in the non-manufacturing PMI (Thursday) to 51.5. With both ISM reports, moves in the employment balances will be closely watched, as the outturns will allow financial markets to firm up expectations for the non-farm payroll (NFP) report – chart b. The ADP employment estimate (Wednesday) will also provide further guidance. Our current expectation for Friday's report is that NFPs will decline 160k in November, leaving the unemployment rate static at its 26-year high of 10.2%. The Fed releases its latest conditions of the nation report, the Beige book (Wednesday), which will be used as the basis of discussion for the FOMC meeting on 16 December. Four FOMC members are scheduled to speak this week (Chairman Bernanke, Plosser, Lacker and Bullard).

Thursday sees the ECB rate decision, where it is expected to maintain the refinancing rate 1%. Of more significance will be whether President Trichet provides confirmation that the one-year Long-term Refinancing Operation (scheduled for mid-December) will be the last. If so, it will be interpreted as being the first step by the ECB in unwinding its unconventional policy measures. The press conference will also report the latest quarterly ECB staff projections. On the data front, small increases in both the manufacturing and services PMIs for the region are forecast (to 51.0 and 53.2 respectively), which will flag that the GDP in the region will probably expand in Q4 at the same (0.4%) rate recorded in Q3. Ahead of the ECB decision, Tumpel-Gugerell speaks (Tuesday), while Weber and Bini Smaghi are scheduled to speak (on Thursday and Friday respectively).

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