Business

Like ships passing in the night……..

European Central Bank chief Mario Draghi
European Central Bank chief Mario Draghi European Central Bank chief Mario Draghi

MONETARY policy remains the key focus for participants in the financial markets. The European Central Bank (ECB) surprised the markets with a very dovish tone last week. It gave a strong signal that more policy easing is coming sooner rather than later, noting that the “degree of monetary policy accommodation will need to be re-examined at the December meeting”.

In the post meeting press conference, the ECB president Mario Draghi reinforced this point by stating that the Governing Council’s mind-set is not wait-and-see but “work-and-assess”. Further easing may include a cut to the discount interest rate, as well as increasing quantitative easing purchases.

Not surprisingly, given the strong indications that further ECB easing is imminent, the euro has weakened. It fell towards the $1.10 mark versus the US dollar and to around 72p against sterling.

Bond yields have also fallen sharply in the aftermath of the ECB meeting, while equities were boosted by the news. The other side of the market’s current fixation with monetary policy are those central banks that are contemplating hiking interest rates. In this context, the immediate focus is on the US Federal Reserve.

Therefore, the outcome of this week’s Federal Open Market Committee (FOMC) meeting will garner plenty of attention. Recent US data have had a somewhat mixed tone (including the weaker than expected non-farm payrolls). This is in addition to the US central bank’s concerns over downside risks to its outlook for inflation and the potential impact on the US economy from slower growth in emerging economies. These factors have resulted in the Fed delaying the start time for hikes to US interest rates.

For the moment, the financial markets are not expecting a full 0.25 per cent rate hike until the middle of 2016. Thus, no policy changes are anticipated this week. However, the meeting statement will be analysed for any indications as to whether a change in policy remains on the table at the final meeting of the year in December, which would be consistent with current FOMC interest rate projections.

Data-wise in the US, we get the first reading of US GDP for the third quarter of the year. The pace of annualised growth is forecast to ease to 1.7 per cent from 3.9 per cent, reflecting in part weaker external trade, as well as some base effects given the strong pick-up in quarter two. Personal income and consumption for September are also due.

The latter has remained solid recently. Another pick-up is anticipated in September, suggesting consumption remained a key driver of US growth in the third quarter. The employment cost index for quarter three will also bear watching, with wage inflation an important input into the Fed’s policy deliberations.

We also get the first estimate of UK GDP for the third quarter. Data in the quarter suggested that growth may have slowed. The UK composite Purchasing Managers’ Index (PMI) recorded its weakest quarterly performance since Q2 2013. Industrial production data also signalled softer growth. Although, retail sales were solid, indicating that consumer spending remained an important factor for growth in the UK. The forecast is for the pace of growth to have slowed slightly to 0.6 per cent - from 0.7 per cent in quarter two.

Meanwhile in the eurozone, in light of the heightened concerns over the weak inflationary environment, German inflation data for October is a significant release ahead of next week’s aggregate eurozone figures. Inflation in the currency bloc’s largest economy looks to have edged up out of negative territory. Similar to the US and UK calendars, the eurozone schedule includes some third quarter GDP data from Spain and Belgium.