ECB and Bank of England to hold policy once again



US jobs and services slips once agian blamed on snow Bank of England to keep rates at 0.5% into 6th year
Eurozone and UK services PMIs show decent growth in February ECB will probably hold despite need for aggressive stimulus

For once this week, the focus of world markets has shifted from Ukraine back onto economic matters. This was courtesy of another round of poor US data that is only partly affected by the recent weather travails. The ADP employment change showed the US economy gained only 139,000 jobs in February against an expectation of 155,000. That’s easy to admonish the weather for, but the revisions to the previous 4 months of data are not as easily explained away.

Revisions erased the sum total of 138,000 jobs over that 4 month period and highlights the likelihood that Q3’s output may have been a high-water mark and that pressures on jobs re-emerged through Q4 of last year and continued into the current 3 month period. Cross-correlating the ADP numbers with official Bureau of Labor Statistics payrolls releases are a fool’s errand; the linkage is marginal at best but should this Friday’s non-farms number disappoint then it will be Fed members, not just the markets, that may be questioning the timing of a reduction in monetary stimulus. Payrolls estimates have fallen this week from 155k on Monday to 146k as we open up in Europe on Thursday. The number is due at 13.30 GMT.

Another weather affected measure was the ISM from the US services sector. Of particular concern was the slip in the employment component that contracted violently, to the lowest level in more than 5 years. The weather argument will only hold up if hiring increases as temperatures do in the long run and as we have said in the past, April may well be the calendar stop on this particular trade.

The latest services data from Europe indicated further signs of expansion yesterday. Germany’s PMI hit a 33-month high of 56.4 while the Italian figure of 52.9 was close to a 3yr high pushing the overall Eurozone number to 52.6. France was once again the let-down, contracting in February for the 4th month in a row. We are reticent to call this a European recovery however; unemployment at 12% and a central bank that is still worried about deflation have taken care of that for now.

Likewise, UK data has shown the services sector continues to expand at a very good rate, despite February’s PMI reading of 58.2 being the slowest rate of improvement since June of last year. Employment growth has also continued higher following a move in confidence to the highest levels in 4.5 years with 54% of those surveyed looking at continuing growth through the remainder of the year. The mild winter, as opposed to the recent wet weather, has also been cited as a reason for growth.

Putting the three surveys – manufacturing, construction and services – together, we can now forecast that growth in Q1 will remain at around 0.7% QoQ with strong jobs growth and with consumer and business confidence acting as a continuing and lively benefit. The good times may be here to stay.

Today is of course central bank day with the ECB and BOE deciding their latest policy this afternoon. The Bank of England may not be having a cake to mark rates being at 0.5% for 5 full years as of yesterday but will likely celebrate with another rate hold. A statement to accompany the decision is also unlikely.

The ECB is obviously a more difficult decision to call. While the latest CPI number from the wider Eurozone surprisingly rose this month from 0.7% to 0.8%, we have serious doubts as to the veracity of this number. The latest numbers from Spain, Italy and Germany showed a negative reading, so unless France somehow exceeded expectations massively then these figures are out of kilter. Even if the ECB doesn’t believe that there are deflationary pressures, the very low rate of inflation must be a concern and we would hope that this would be enough to prompt some form of action. We doubt it however, and fully expect the ECB to maintain its reputation as one of the least proactive monetary bodies out there.

Around 26% of economists surveyed by Bloomberg are expecting some form of a rate cut, either by 10bps or 15bps with one also expecting a cut into a negative deposit rate. We are with the majority in expecting no change in rates today nor a move towards alternative strategies such as the purchases of asset backed securities or full blown quantitative easing. Previous meetings within which policy has been left on hold have been EUR positive in the past, so there is reason to look for a strong euro this afternoon.

Have a great day.

Indicative Rates



GBPEUR 1.2166 1.2188
GBPUSD 1.6708 1.6729
EURUSD 1.3719 1.3740
GBPJPY 171.72 171.94
GBPAUD 1.8513 1.8536
GBPNZD 1.9783 1.9808
GBPCAD 1.8437 1.8461
NZDUSD 0.8438 0.8454
GBPZAR 17.825 17.851
USDZAR 10.657 10.682
GBPPLN 5.0798 5.1022
EURJPY 140.95 141.15

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Sectors: Foreign Exchange
Topics: Currency Exchange and Finance
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