Draghi to defy and disappoint the doves

• ECB meeting comes amid increased disinflation    

• Chinese add mini-stimulus, spending on railways

• Services numbers due throughout day. UK at 09.30, US at 15.00

• ADP hits 191,000 jobs in March, NFP tomorrow after claims today

ECB officials met in Frankfurt yesterday, a meeting that continues today with the markets once again sat waiting for some movement on monetary policy. Recent days have revealed another another downward step for prices in the Eurozone. Monday’s CPI number surprised to the low side and came in at 0.5% – just a quarter of the ECB’s target. The accompanying ‘core’ figure – that eliminates volatile readings from inputs such as fuel and food – was stable at 0.8%. This may provide the ECB a crutch in the argument that an immediate need to cut rates is not warranted although this is straw clutching in our eyes.

Producer prices were shown to have fallen 0.2% in the month of March and 1.7% on the year – the fastest rate since December 2009. Some of this will be passed through to CPI baskets in the coming months, increasing pressure on prices. Similar news was seen in anecdotal evidence from some of the strong peripheral PMIs from the manufacturing sector on Tuesday – price costs are being widely seen in response to flagging demand.

It is our opinion that the ECB will once again stay the course and keep policy stable today with no cuts to the main refinancing rate or a push into negative territory on the deposit rate. To be honest, we must not see a slight rate cut as a panacea for all the Eurozone’s ills. Longer-term, aggressive and unconventional measures are needed but we fear that these will remain theoretically ethereal for the European Central Bank at the moment.

We do think that Draghi cannot be seen to be ambivalent to the moves in price markets and will use his post-decision press conference to once again lay out that ALL measures (emphasis ours) are open to the Bank at this point in time. Away from simple QE, measures such as lowering banks reserve requirements, suspending the drain of liquidity from bond purchases made in 2010 or allowing more liquidity into markets via a new LTRO are all open to the Committee. These measures will be left on the table however in our view.

PMIs from the Eurozone are due throughout the morning; Italy’s is due at 08.45, France at 08.50, Germany at 08.55, the Eurozone at 09.00 and UK at 09.30 – all times BST. Expansion of the services sector is key to most Western economies and we look to see all these measures put in numbers solidly above 50.0.

UK construction remained strong yesterday and March’s figure of 62.5 will solidify expectations that the growth in and around the construction sector will continue to build throughout the year. Growth next month will see 12 consecutive months of growth for the first time since the global financial crisis. Once again it was the housing market that drove demand onwards; something that is not at all surprising given this morning’s Nationwide house price index showing the average property price rising by 9.5% year-on-year. The one caveat to all of this is the rate of growth’s impact on supply chains; sub-contractors are stretched to breaking point and may provide a break, but not a stop, on further improvements.

Although the focus will very much be on the Eurozone today, there is a slice of US data that will affect thoughts before tomorrow’s payrolls announcement. Yesterday’s ADP look at the jobs market posted a gain of 191,000 jobs in March – in line with estimates – and a +39k revision to the previous number which solidified hopes for a good number tomorrow. A strong showing by the services sector, adding 164,000 jobs, points to a strong services ISM number at 15.00 today while a decent claims number at 13.30 will embolden USD bulls for the jobs release 24hrs later.

Markets are quiet this morning but are generally positive after Beijing announced a ‘mini-stimulus’ package. The plan is to build new railways and give tax breaks for small businesses; not the huge credit spending of recent times but a decision that something needs to be done in light of recent poor spending numbers.

Have a great day.