PMIs on the up

February 5, 2014

Slowing growth in the Chinese and U.S. factory sectors earlier this week did nothing to soothe frayed market nerves and put a firm focus on today’s service sector PMI surveys in Europe along with the equivalent U.S. report and a weekly jobless number there.

While the world’s two largest economies suffered a hiccup, euro zone factories had their best month since mid-2011 in January. But it is the service sector that dominates in Europe. Flash readings, which are not usually revised much, showed the euro zone services reading hit a four-month high with France lagging Germany again although even its number rose. Today we’ll get the first numbers for Italy, Spain and Britain.

The reports will be the last meaningful pieces of evidence the European Central Bank gets to chew over before Thursday’s policy decision. Emerging market tumult and its possible effect on already vanishing inflation will be bang at the top of its agenda.

It’s probably too early to force a policy move this week – particularly since the next set of ECB economic and inflation forecasts are due in March – but the market ructions are an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January, way below the ECB’s target of close to but below two percent. If turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.

Central banks have already been thrown out of kilter. Turkey whacked up its key rate by a stunning 4.5 points last week without doing much good for the lira. South Africa tightened the following day. Neither move would have been considered remotely likely a month ago.

But signs of alarm in central and eastern Europe eased. Romania bucked the trend yesterday, cutting rates to a new record low despite having been forced to intervene to bolster its leu currency last week. The leu actually rose in response with an agreement between Bucharest and the IMF on an aid programme review also helping.

Hungary sold more treasury bills than planned after a failed debt auction last week though that could signal a scramble to get out of longer maturity paper given rising uncertainty about Budapest’s ability to keep interest rates low having cut month in, month out for 1-1/2 years. Today, we get the minutes of the Hungarians’ last policy meeting at which they cut rates for the umpteenth time, albeit by a salami slice.

The Polish central bank meets today. It has declared it is not concerned about the falling zloty because domestic economic fundamentals are sound but has a mantra that it could intervene if volatility gets out of hand. The central bank won’t do anything this time.

Turkey remains the most vulnerable emerger on our patch with Prime Minister Tayyip Erdogan’s aggressive response to a corruption inquiry unnerving investors already struggling with the impact of the Fed’s taper. Erdogan has promised an “out of the ordinary” economic package without giving any detail and the government has ruled out capital controls, this after the 4.5 point rate rise failed to underpin the tumbling lira.

Erdogan is determined to maintain growth with elections looming and has railed against what he describes as an “interest rate lobby” of speculators seeking to undermine his country.
Both Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Simsek are speaking today. In Berlin yesterday, Erdogan heard Angela Merkel voice her scepticism about Turkey joining the EU.

Ukraine is an equally extraordinary story. President Viktor Yanukovich appears increasingly isolated having offered a string of concessions to his political opponents but failed to co-opt them and has so far failed to name a new prime minister having turfed out his own government. Yesterday, the opposition pressed for a return to a previous constitution, which would mean Yanukovich losing some of the key powers he has accumulated since being elected in 2010.

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