No Surprises from the ECB; PMIs Key for the Pound

The latest market highlights and our views on the key developments as the euro declines despite a non-event ECB meeting; markets continue to strike a risk-off tone on ongoing virus concerns; and this morning's flash PMI surveys are key for the BoE policy outlook

Previous Day's Market Highlights

ECB - Snoozefest & Strategy Review

Thursday's ECB policy decision appeared to set the tone well for the year ahead, with policy left on hold and little fresh commentary for market participants to get their teeth into.

As expected, the Governing Council left all monetary policy instruments untouched; leaving the refinancing rate at 0.0%, the deposit rate at -0.5%, and continuing the 20bln EUR per month quantitative easing programme in an 'open ended' manner.

President Lagarde's commentary on the state of the eurozone economy was, while modestly more upbeat, largely similar to the December meeting. Despite inflation remaining relatively benign, Lagarde noted that there were 'some signs' that underlying inflation was ticking higher. Furthermore, on the economy, while risks to the outlook remain tilted to the downside, Lagarde stated that they are now 'less pronounced' - largely due to levels of trade uncertainty receding.

Of course, Lagarde also reiterated the now customary pledge that the Governing Council stands ready to adjust all policy instruments as appropriate.

Despite the policy decision and press conference both largely being non-events, market participants didn't get any more excitement from the strategy review announcement.

Policymakers confirmed that the review, the first since 2003, will last until the end of the year, covering the ECB's price target mandate, the monetary policy toolkit and communication practices. These were all heavily expected, as I flagged in this Note yesterday.

Of some interest, however, was the confirmation that the review will encompass environmental sustainability, something that is becoming an ever-greater focus of global central banks. I shall leave the question of whether or not climate change is within a central bank's mandate for another time, however it would appear that 'green' monetary policies feature highly on President Lagarde's agenda.

Turning to markets, the policy decision did little to lift the euro - barring a brief pop higher on Lagarde's 'balance of risks' remark - with the common currency also facing a headwind from a stronger dollar.

The euro ended the day around 0.6% lower, falling to a 6-week low at $1.1035. This decline represented the euro's biggest one-day decline since early-November; though this is more representative of the recent run of subdued volatility than it is of the magnitude of yesterday's move.

Yesterday's Data

A number of notable data points were released yesterday, including:

  • Last week's US initial jobless claims report showed claims ticking up to 211,000 - broadly in line with the 4-week average of 213,000
  • Fourth quarter inflation from New Zealand surprised to the upside overnight, with CPI increasing by 1.9% YoY as 2019 drew to a close; re-affirming my view that the RBNZ are now on hold
  • Japanese inflation figures, referencing December, also surprised, with CPI jumping by 0.8% YoY - whether this is a temporary bounce or longer-term trend remains to be seen


Thursday's Scorecard

Risk aversion was the major theme of the day on Thursday, with investors remaining concerned about the ongoing coronavirus outbreak sweeping South East Asia.

As such, the Japanese yen picked up a solid bid, as did the US dollar. The Swiss franc also gained ground, boosted by both haven demand and comments from SNB Chairman Jordan stating that policymakers are not attempting to manipulate the value of the franc.

Yesterday's scores on the doors across G10 FX are below;


Any Other Business

  • The aforementioned coronavirus induced risk-off tone was also in evidence in equities. In Europe, the pan-continental Stoxx 600 lost 0.7%. In the US, despite earlier losses, the S&P 500 recovered to close 0.1% higher
  • Oil prices continued to decline on Thursday, as fears over a Chinese economic slowdown and potential over-supply continued to weigh on markets. Global benchmark Brent settled 1.85% lower, while US WTI crude shed 2%
Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1885 1.1880 1.1632 2.09%
GBP/USD 1.3130 1.3266 1.2954 2.35%
EUR/USD 1.1050 1.1239 1.1035 1.82%
GBP/AUD 1.9190 1.9225 1.8766 2.39%
GBP/NZD 1.9850 1.9951 1.9415 2.69%
GBP/CAD 1.7240 1.7306 1.6918 2.24%

Today's Market Highlights

PMIs to Complete the Pre-BoE Data Puzzle

Today's main event will be this morning's flash UK PMI surveys, the first top-tier data point referencing the economic situation after the general election - and a crucial, final, piece in the data jigsaw ahead of the BoE's policy decision next Thursday.

Expectations are for the PMIs to show something of a post-election 'Boris bounce' in the UK economy, spread across both the manufacturing and services sectors.

In the production sector, January's PMI is expected to tick up to 48.9, an increase on December's 47.5, though still in contractionary territory below the crucial 50.0 breakeven mark.

Meanwhile, the services PMI is expected to have rebounded at the beginning of the year, with the index set to rise 1 index point to 51.0.

The increases in both gauges should push the composite PMI, which measures output across the economy, higher, with expectations for a print of 50.7.

Bearing in mind the recent dovish comments from a host of BoE policymakers, and the market's rather confused view on the January policy decision - now pricing a 48% chance of a cut, down from 70% on Monday - the PMIs should clear up which way next week's decision will go.

Of course, a solid bounce in the PMIs will significantly reduce the chances of a cut next week, sending sterling higher. A miss, however, would still leave the situation unclear, with some recent sentiment indicators pointing to a solid increase in sentiment. The question is whether the BoE want to pre-emptively act, or whether they would prefer to wait and see whether improving optimism translates into greater economic output.

My base case, barring a cataclysmic PMI figure this morning, is for no change in rates, but with a 6-3 vote split with external MPC member Vlieghe the most likely contender to join the dovish dissenters.

However, Governor Carney is not known as the unreliable boyfriend for nothing, hence next week's policy meeting is most definitely live, and certainly has the potential to surprise one way or another.


More Tentative Green Shoots in the Eurozone?

Across the Channel, today's other major data release also comes in the form of flash PMI figures, this time from the eurozone.

The surveys - again referencing January - are expected to show tentative green shoots of recovery continuing to grow in the eurozone economy.

In the manufacturing sector, which has contracted for almost a year now, the PMI is expected to record a second straight increase, bouncing to 46.8. While still well inside contractionary territory, the bounce would be further evidence that the ongoing industrial slowdown has bottomed out.

Elsewhere, the services sector is expected to have continued expanding at its fastest pace in 5 months, with the PMI expected to print 52.8.



While signs that the manufacturing slowdown has bottomed, crucially before spilling-over into the wider economy, are welcome, there's still a long way for the eurozone economy to go, hence this morning's releases are unlikely to significantly alter the policy outlook.


Canadian Retail Sales

Across the pond, the North American session contains only one notable data release, November's Canadian retail sales report.

Both headline and ex-autos, sales are expected to have increased by 0.4% MoM, a solid rebound from an extremely disappointing decline in both measures last October.

The release, though slightly stale, will be closely examined by the Bank of Canada, with policymakers having adopted a firmly data dependent stance at Wednesday's policy meeting.


Looking Ahead to Next Week

Monetary policy will also be a major theme dominating the coming trading week, with policy decisions due from both the Federal Reserve and the Bank of England.

As mentioned above, the BoE outlook should become more definitive after this morning's PMI surveys.

The FOMC's policy outlook, however, is much clearer. Barring an economic catastrophe - a 'material reassessment' of the outlook in Fedspeak - rates are set to remain on hold at least for the next 12 months. Focus will, therefore, be on any comments relating to the Fed's ongoing balance sheet expansion, particularly when the Fed are likely to pull back from the repo market.

As I've discussed at some length, this is not QE, however the balance sheet expansion is undoubtedly providing solid support to risk assets. Indications that the Fed may turn off the 'easy money' taps and step back from the market will likely result in a significant pullback in US equity markets.

On the macro front, next week's calendar contains a handful of notable prints. From the eurozone, attention will likely centre on Friday's release of January's flash CPI figures, along with the first read on fourth quarter GDP.

Elsewhere, January's US consumer confidence report is due, as are fourth quarter inflation figures from Australia.

Finally, next Friday is Brexit day, when the UK leaves the EU, and enters the post-Brexit transition period.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.00am EUR Flash Manufacturing PMI (Jan) 46.8 46.3
9.00am EUR Flash Services PMI (Jan) 52.8 52.8
9.00am EUR Flash Composite PMI (Jan) 51.2 50.9
9.30am GBP Flash Manufacturing PMI (Jan) 48.9 47.5
9.30am GBP Flash Services PMI (Jan) 51.0 50.0
1.30pm CAD Retail Sales (MoM - Nov) 0.4% -1.2%
1.30pm CAD Retail Sales ex-Autos (MoM - Nov) 0.4% -0.5%