ECB to deliver further stimulus

• Markets await scale of ECB stimulus against a subdued inflation background
• US data to suggest strong rebound in Q2 activity
• Bank of England to stand pat amid more mixed data

ECB poised to act... At the press conference following the May ECB meeting, President Draghi hinted strongly that the ECB was primed to loosen policy in June, although he stopped short of pre-committing, deferring any decision until after the publication of the latest staff economic projections. Since then, market participants have been widely speculating over the likely outcome, with comments from various Council members providing only limited insight into possible measures. The coming week’s Council meeting will end this speculation. We expect the ECB to announce a range of policy measures, headlined by a 15bps cut in the refi rate to 0.10%, with broadly similar cuts expected in both the marginal lending and deposit rates, pushing the latter into negative territory. This may be supplemented by additional liquidity measures, the most likely options are: an extension of the fixed rate full allotment policy; non-sterilisation of the SMP programme; and/or a ‘targeted’ longer-dated LTRO. Although there has been some talk of an ABS purchase programme or even outright QE, we think these are less likely.

Weak euro area inflation... In the run up to the ECB meeting, the preliminary reading of May euro area inflation (Tues) is expected to post its eight consecutive sub 1% outturn. Subdued readings from Spain, Italy and Belgium this week, are expected to be mirrored in the German estimate (Mon), with the aggregate euro area reading forecast to be unchanged at 0.7%. While this is unlikely to significantly alter the mindset of the ECB Council ahead of Thursday, it should serve to underscore the pressing need for further stimulus.

UK policy debate more balanced... The MPC also delivers its latest policy verdict on Thursday with the Committee set to keep Bank Rate and the size of the APF unchanged. However, comments over the past week from Martin Weale reiterated his hawkish bias. Nevertheless, with changes in the composition of the Committee set to impact from June, he is likely to remain in the minority for some time. The coming week’s data are expected to highlight that the domestic growth outlook remains upbeat, with the PMIs expected to point to continued robust expansion, albeit softer than the previous month.

US GDP to rebound in Q2.... The big news in the US over the past week was the downward revision to Q1 GDP growth to a fall of 1% annualised - the first quarterly decline for three years. However, as this was mostly due to less inventory accumulation, it increases the potential for a strong rebound in Q2. With final demand also expected to bounce back strongly after being depressed by exceptionally cold weather in Q1, we expect GDP growth of 4% annualised in the current quarter.

Strong payrolls number expected for May... The coming week will see the first of the important US economic indicators for May, culminating in the employment report on Friday. We forecast payrolls to show a gain of 215k, which would be the fourth consecutive monthly rise in excess of 200k. Employment growth so far this year has been quicker than in 2013, suggesting the GDP data may be underestimating activity. Markets will also closely watch other parts of the labour market report - in particular the unemployment rate, which we expect to remain steady at a recovery low of 6.3%, and average earnings growth, which should accelerate modestly. Earlier in the week the ISM manufacturing (Mon) and non-manufacturing (Weds) surveys for May should signal a further acceleration following their April gains.

And finally... The Chinese PMI for May is expected to provide signs of stabilisation following a recent slowdown in manufacturing activity.