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.