The Fed reduces target rate 75bp to a range of 0% to 0.25%
German PMI manufacturing hit a new all-time low (33.5 vs cons 34.6) while the German PMI services came in above expectations (46.4 vs cons 44). The services figure is lagging the industry, so UBS economists expect further weakening ahead for that reading. Both indicators show that employment is likely to worsen in coming months. The Eurozone PMI manufacturing and services were both broadly in line with consensus, but were still at all-time lows. With all the series close to the lows, it is likely we will see a contraction in Q4 GDP and possible into Q1 2009 as well. From a macro perspective we remain of the view that the continued deterioration in growth data will increase the need for the ECB to ease rates further. However, ECB president Trichet said that at the current stage he feels there is a limit to the decrease in rates. Other ECB members also highlighted that the impact of the most recent easing in rates needs to be evaluated before deciding on further steps, indicating a retreat from an aggressive stance on monetary policy. The recent commentary has cast some doubt on whether the ECB will cut again on January 15. This all comes ahead of Eurozone CPI data, which is expected to show a month-over-month decline for November (cons -0.5% m/m, prior 0.0%). That said, despite the poor PMI data and a likely weak Ifo reading ahead, a hawkish ECB is supporting EUR for now. This looks set to continue into year end. However, my view is that EUR will begin to weaken again when the FED reaches bottom and the ECB has to cut rates further. Stay tuned.
GBP: BoE minutes
BoE's minutes for its rate decision to lower policy rates by 100bps are due on Wednesday and unanimous decision will not be a surprise, given increased downside risks to UK economic growth and deflationary concerns. Labour data, also due on Wednesday, is likely to show declines and we expect October ILO unemployment rate to be at 5.8% while markets looks for a rise to 6.0% from 5.8% currently. On Tuesday, the CPI came in slightly higher than expected at 4.1%y/y (cons 3.9%, prior 4.5%) but was lower than the October reading. Core CPI was 2.0% (cons 1.8%, prior 1.9%). With the economy in a slide, inflation expectations have sharply fallen. The market is expecting another 50 bps cut in rates at the January 9 meeting to take the policy rate to 1.5%. Rates views, more weak data and likely negative comments from the BoE minutes are likely to keep the GBP heavy for now in our view.
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