Eurozone economic data did not beat expectations
05/08/09 22:11
New Zealand Workshop
Aug 14-16
Eurozone economic data did not beat expectations as much as UK data but nevertheless provided some positive momentum heading into the ECB decision. We expect the ECB will not change the official rate, but most important is the press conference for any signals of potential future policy actions. But we also think there is a chance the ECB could be more dovish on balance, wich will pull EUR back.
Despite the recent string of positive data, the ECB decision may be more delicately poised than the market is currently positioned for and the recent breakout in EURUSD above the June high would only increase the ECB's fears that monetary conditions are tightening earlier and at a faster pace than necessary. As EUR strengthens, it puts further pressure on the economic conditions.
The Article IV consultation by the IMF published last week issued several warnings for the Eurozone economy and in particular called for the Governing Council to fully utilise what little margin it still has for rate cuts. It is interesting to note that at every single post-meeting conference, ECB President Trichet stressed that 1% is not the floor in rates, indicating that there is still a body of opinion within the Governing Council which favours further cuts. While we are by no means suggesting that the ECB will administer an unexpected cut, we think at the very least it is possible that the outcome would be more dovish than expected.
Aug 14-16
Eurozone economic data did not beat expectations as much as UK data but nevertheless provided some positive momentum heading into the ECB decision. We expect the ECB will not change the official rate, but most important is the press conference for any signals of potential future policy actions. But we also think there is a chance the ECB could be more dovish on balance, wich will pull EUR back.
Despite the recent string of positive data, the ECB decision may be more delicately poised than the market is currently positioned for and the recent breakout in EURUSD above the June high would only increase the ECB's fears that monetary conditions are tightening earlier and at a faster pace than necessary. As EUR strengthens, it puts further pressure on the economic conditions.
The Article IV consultation by the IMF published last week issued several warnings for the Eurozone economy and in particular called for the Governing Council to fully utilise what little margin it still has for rate cuts. It is interesting to note that at every single post-meeting conference, ECB President Trichet stressed that 1% is not the floor in rates, indicating that there is still a body of opinion within the Governing Council which favours further cuts. While we are by no means suggesting that the ECB will administer an unexpected cut, we think at the very least it is possible that the outcome would be more dovish than expected.
The EUR's value is probably more of an issue than the
ECB would like to admit. According to the IMF, the
EUR is currently overvalued in a range of 0-15% and
this has prevented any gains in the margins for
Eurozone exporters. This is not a welcome development
for the region's manufacturers and monetary
conditions also need to be accommodative to create a
positive environment for banks to cleanse balance
sheets. A more dovish tone would prevent yields from
becoming more attractive but could also put more
downward pressure on the euro rather than simply
alleviating current interest in the currency.
The non-manufacturing ISM disappointed expectations of 48.0 by coming in at 46.4, down from 47.0 previously.
UBS economists have not changed their -250k forecast for payrolls in July after the recent disappointing data. The ADP estimate has been unreliable in signalling the official private payrolls data and the slippage in the non-manufacturing ISM employment index was countered by a rise in the manufacturing ISM employment index. Still, the ADP and non-manufacturing ISM data lessen the likelihood of a large upside surprise in payrolls.
Eurozone Services PMI continued the recent trend of expectation-beating data releases and rose to 45.7 versus consensus 45.6. The composite reading managed to reach 47.0 against expectations of 46.8.
Services PMI for July beat expectations of 51.8 at 53.2 versus 51.6 previously. Industrial production and manufacturing production expanded in July at 0.5% m/m versus consensus 0.0% and 0.4% m/m versus consensus -0.1% m/m, respectively.
UK. Investors will now turn to the BoE's policy decision. Today's strong data may encourage the adoption of a "wait and see" approach, effectively pausing QE operations to see if the economy recovers without further quantitative stimulus. We do not expect a change in the official rate and think the BoE will indeed enter a "wait and see" mode with regards to the size of the QE program.
In New Zealand, the labour market will likely soften for the rest of the year as our economists are looking for the unemployment rate to increase from 5.0% to 5.3% for the second quarter (consensus 5.7%). They note a softening labour market will flag additional downside for wage inflation ahead, which reduces any inflation-related worries from the labour market in the near-term.
The reported jump in milk prices by a major New Zealand dairy exporter boosted NZD, which could mean that the NZD could also be a beneficiary from the global economic upswing. But RBNZ officials will remain wary of the impact of NZD strength on growth prospects.
Ref: UBS, Bloomberg
The non-manufacturing ISM disappointed expectations of 48.0 by coming in at 46.4, down from 47.0 previously.
UBS economists have not changed their -250k forecast for payrolls in July after the recent disappointing data. The ADP estimate has been unreliable in signalling the official private payrolls data and the slippage in the non-manufacturing ISM employment index was countered by a rise in the manufacturing ISM employment index. Still, the ADP and non-manufacturing ISM data lessen the likelihood of a large upside surprise in payrolls.
Eurozone Services PMI continued the recent trend of expectation-beating data releases and rose to 45.7 versus consensus 45.6. The composite reading managed to reach 47.0 against expectations of 46.8.
Services PMI for July beat expectations of 51.8 at 53.2 versus 51.6 previously. Industrial production and manufacturing production expanded in July at 0.5% m/m versus consensus 0.0% and 0.4% m/m versus consensus -0.1% m/m, respectively.
UK. Investors will now turn to the BoE's policy decision. Today's strong data may encourage the adoption of a "wait and see" approach, effectively pausing QE operations to see if the economy recovers without further quantitative stimulus. We do not expect a change in the official rate and think the BoE will indeed enter a "wait and see" mode with regards to the size of the QE program.
In New Zealand, the labour market will likely soften for the rest of the year as our economists are looking for the unemployment rate to increase from 5.0% to 5.3% for the second quarter (consensus 5.7%). They note a softening labour market will flag additional downside for wage inflation ahead, which reduces any inflation-related worries from the labour market in the near-term.
The reported jump in milk prices by a major New Zealand dairy exporter boosted NZD, which could mean that the NZD could also be a beneficiary from the global economic upswing. But RBNZ officials will remain wary of the impact of NZD strength on growth prospects.
Ref: UBS, Bloomberg