Data to shape ECB week

January 6, 2014

Euro zone service sector PMIs and German inflation (with the euro zone number to follow on Tuesday) will lay the ground for the European Central Bank’s first policy meeting of the year.

The surveys are likely to show the currency bloc ended the year on a reasonably robust note with Germany leading the way as always, Italy and Spain showing signs of life and France looking worryingly weak.

Ireland’s reading is already out and has posted its fastest services growth in seven years. Much more importantly for the world, growth in China’s services industries slowed in December, confirming that the world’s second-largest economy lost steam at the end of last year.

German inflation on the EU-compatible HICP measure is forecast to have fallen to 1.4 percent year-on-year in December, from 1.6 in November, not the sort of move the ECB will like to see. We’ve already seen Italian and Spanish inflation come in at just 0.6 and 0.3 percent respectively.

A shock fall in euro zone inflation to 0.7 percent prompted an interest rate cut to 0.25 percent in November (not much scope to lower from there) followed by a chorus of denials that deflation was a threat.

ECB chief Mario Draghi adhered to that last week but added that he and his colleagues had to make sure inflation didn’t get stuck in the “danger zone” below one percent. By happy or unhappy coincidence, the latest inflation euro inflation data are due on Tuesday, two days before the ECB meets, and are forecast to show the rate unchanged at 0.9 percent.

It’s too early for any dramatic moves but the ECB may well be pushed into easing policy if inflation refuses to pick up and/or the banks clam up ahead of this year’s health tests.

We pretty much know the state of play within the ECB. With rates already close to zero, there will be no rush to cut them again, another gush of long-term cheap money for the banks is possible, particularly if the looming bank health tests cause them to tighten up further, but too many of its policymakers are viscerally opposed to printing money for that to become an option unless deflation seriously took hold.

U.S. Treasury Secretary Jack Lew will visit Berlin, Paris and Lisbon in the early part of the week. The agenda is not yet clear but the last time Lew was in Europe he was indirectly critical of Germany, stressing the need for Europe to boost domestic demand.

He also described banking union as crucial for the long-term stability of the euro zone. So his  views on whether the piecemeal agreement clinched in December is satisfactory to Washington is a key issue.

IMF chief Christine Lagarde is speaking in Kenya.

Britain’s services PMI has reflected the strong growth (albeit from a low base) seen over the past six months. But finance minister George Osborne will don the hair shirt again today, saying that the job of fixing Britain’s still wide budget deficit is far from done.

With one eye on next year’s election he will say the way to cut taxes permanently is to cut spending permanently. The election timetable is starting to impose itself. Prime Minister David Cameron pledged on Sunday to protect pensioners’ incomes, saying the state payment would rise annually by the rate of inflation, average wage increases or 2.5 percent, whichever was the higher.

Turkish markets have settled after taking a hammering due to a wide-ranging corruption investigation which has led to the resignation of three members of the cabinet and highlighted concern about the independence of the judiciary.

Prime Minister Tayyip Erdogan may have offered something of an olive branch, saying he would not oppose the retrial of hundreds of military officers convicted on coup plot charges. Turkey’s appeals court in October upheld the convictions of top retired officers for leading a plot to overthrow Erdogan’s government a decade ago.
Erdogan is flying to Japan to start an Asia tour which will also take in Singapore and Malaysia.

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