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Weekly Economic Data Preview
Knife-Edge MPC Decision to Take Centre Stage
The MPC makes its announcement on whether or not to extend the Bank of England's Asset Purchase Facility (APF) this Thursday. Since the quantitative easing programme was implemented in March last year, changes to the size of the APF have only been made in quarterly Inflation Report months when a comprehensive assessment is conducted. Financial markets therefore see this week's decision as pivotal. Since the MPC's November assessment, GDP has been significantly weaker than expected, with 0.1% growth in Q4 four times smaller than the expectation implied by the Inflation Report projection. The composition of growth was also disappointing, driven predominantly by a boost from government services output and the car scrappage scheme, rather than underlying private sector strength. The lower starting point for the growth projections in February's Inflation Report will increase the chances of an undershoot of the 2% inflation target at the two-year horizon, assuming Bank Rate and the APF are unchanged. Although Q4 CPI inflation was 0.2 percentage points higher than the Bank's forecast, this is more a reflection of unfavourable energy base effects and the impact of past sterling weakness on imported inflation. More significant is the sheer magnitude of the output gap which has opened up during the recession, which will put substantial downward pressure on domestically generated inflation. The MPC is therefore likely to look through a temporary inflation spike in Q1 and remain focused on the potential for a medium-term undershoot of the inflation target. Our central view is therefore that the MPC will vote for a £25bn extension to the APF, but we would not rule out the possibility of further increases over the course of the year. It's likely to be a close call, with a split vote. Ahead of the MPC decision, there is plenty of UK data to pore over, with the release of personal borrowing figures, the PMIs (which are expected be broadly unchanged) and PPI data, where factory gate price inflation is expected to tick higher on import price pressures.
This week sees a very busy US economic data calendar, with January's non-farm payrolls topping the bill. Last month's December payroll data was disappointing (-85k), while the Federal Reserve has noted that although the pace of lay-offs seems to be slowing, few firms are actually hiring. Our own forecast stands at +30k, with an unemployment rate of 9.9%, down from 10% in December. The ADP employment survey for January is also released this week (on Wednesday). January's ISM surveys are also published, where we look for a pick-up in the pace of manufacturing expansion to 55.5 from 54.9 previously. Within services, we expect a return to growth with a reading of 51.5 from 49.8. Finally, on Thursday, we get an indication of unit labour cost pressures. These have been declining recently reflecting the productivity gains associated with economic growth. Our projection stands at -2.2% in the year to Q4.
In many ways, recent euro-zone economic data releases have been superseded by continuing concerns in financial markets about public finances in the so-called peripheral euro-zone countries, especially Greece and Portugal. Greece needs a decisive, durable, fiscal consolidation plan together with far greater transparency in the publication of official data. Importantly, there will be a review of Greece's fiscal plans at February's Ecofin meeting. Highlights in the euro-zone this week include final January PMI readings for manufacturing and services, along with December retail sales and producer prices. For the manufacturing PMI, we look for a small upward revision to 52.1, partly reflecting an improvement in the Italian index, to 51.5 from 50.8 previously. In services, we look for an unchanged reading of 52.3. In terms of national economic data releases, German December factory orders data are scheduled for Thursday, while industrial output figures are published on Friday, where we look for an outturn of +0.5% month-on-month.
Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com
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