Thursday 18 January 2018

Daily Market Update: ECB’s policy announcement in focus today

The final reading of the euro zone manufacturing PMI edged down to a three month low of 51.5 from a reading of 51.7 in April.
The final reading of the euro zone manufacturing PMI edged down to a three month low of 51.5 from a reading of 51.7 in April.

David O'Reilly

In the euro zone, data on Wednesday showed that factory growth remained lackluster in May, adding to gloom over the outlook for second quarter growth.

The final reading of the euro zone manufacturing PMI edged down to a three month low of 51.5 from a reading of 51.7 in April.

UK manufacturing edged back into expansion territory in May but growth remained subdued. Markit said the UK manufacturing PMI ticked up to 50.1 last month from 49.4 in April; economists had forecast a reading of 49.6. The index was only fractionally above the 50.0 level separating growth from contraction.

Separately the Organization for Economic Cooperation and Development (OECD) cut its forecast for UK economic growth this year to 1.7% from an estimate of 2.1% three months ago. In the OECD’s biannual economic outlook, the body warned that Britain’s exit from the EU would have a serious impact on the global economy. The OECD also said that the global economy will grow only 3% this year with businesses wary of investing and consumers cautious about spending. That would be no better than last year which was already the worst since 2009, although the growth they forecast will pick up modestly to 3.3% next year.

Also in the UK the Bank of England released mortgage figures which showed that there were 66,250 home loans approved for house purchases in April, an 11-month low and down on the average of 71,075 over the previous six months.

In the US the manufacturing sector remained in expansion territory in May, with the ISM factory index improving slightly from 50.8 in April to 51.3. The improvement in the headline measure was due to a jump in the supplier deliveries measure, which climbed from 49.1 to 54.1, the highest figure since December 2014. Also in the US the latest Fed Beige Book report on regional economic conditions said that "tight labor markets were widely noted in most districts." Employment and wage growth were described as modest, with pay raises "concentrated in areas of labor tightness."

Overnight ratings agency S&P has raised its GDP growth forecast for Japan in 2017 to 1% from 0.4%, following Japan’s decision to delay a rise in its sales tax by 2.5 years. S&P also lowered Japan’s 2017 annual headline inflation forecast by almost a full percentage point to about 1%.

To the day ahead, in the UK we have construction PMI released at 9:30. A figure of 51.8 is expected, down slightly from the previous figure of 52. In the Eurozone the key event is the ECB policy announcement followed by Mario Draghi’s press conference. No interest rate change is expected today. The corporate bond purchase program and the TLTRO2 operations have both yet to begin, meaning the ECB already has a considerable amount of new (already announced) stimulus coming.  The slightly improved EZ CPI on Tuesday may also have taken some of the pressure off the ECB in regard to further easing, however Draghi’s press conference will be watched as closely as ever. We also get EZ PPI (Producer Price Index) figures at 10:00.

In the US just after lunch we will get the ADP employment change report and initial jobless claims. Analysts expect the ADP report to show an increase to 180k from the previous months 156k. The releases are a good indicator of what to expect from the non-farm payroll report on Friday.

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