Euro growth concerns persist as PMIs decline

Market movers today

• It is a very thin calendar and most focus will be on speeches by Draghi and Weidmann. However, they will both speak at the European Banking Congress and there will probably be much less focus on monetary policy compared to earlier this week, when Draghi said that the current purchase programme could be expanded to include government bonds, see ECB members strengthening easing bias, 17 November 2014.

• The sovereign debt ratings of Denmark, Greece and the Netherlands are up for review. We might see a change to ‘positive’ in the outlook of Greece’s rating.

Selected market news

Euro growth concerns persist as PMIs decline. The Euro flash composite PMI declined by 0.7 points to 51.4 in November and new orders went below 50 for the first time since June 2013, thus still pointing to a declining trend in euro-area activity. The decline was most pronounced in the service sector, with the service PMI slipping to the lowest level in a year, reflecting continued sluggish domestic demand. Meanwhile, the slight decline in the manufacturing index was driven by Germany and France, where the outlook in the latter continues to be weak as reflected by the decline in new orders (see Euro PMIs declined again in November, 20 November 2014). While we look for euro-area activity to improve in 2015, yesterday’s weak data will put further pressure on the ECB. The ECB yesterday published the legal document of its ABS purchasing programme, implying that the programme is effective as of today. However, in our view, the announced measures will prove insufficient to reach the EUR3trn balance sheet target and expectations of additional easing are likely to persist, at least in the near term.

US data mixed but overall interpreted as positive by the market. There were plenty of US data releases for the market to absorb yesterday. Initial jobless claims fell slightly less than expected, CPI held flat in October and the Markit PMI unexpectedly fell 1.2 points to 54.7. In our view, the latter suggests that we will also see a softening of the ISM manufacturing index in the coming months. On the other hand, the Philly Fed index surged to 40.8 from 20.7, though we note that this indicator tends to be quite volatile and has sent wrong signals on previous occasions. US equity markets interpreted the data as positive on balance and the key indices all closed with minor gains.

Verbal intervention by Japan’s Finance Minister. The recent announcement of a snap election has put pressure on the JPY, which has depreciated sharply since the step-up in quantitative easing announced at the Bank of Japan October meeting. This morning, Finance Minister Aso expressed alarm over the pace of depreciation, saying that the ‘pace of decline over the past week has been too fast’. While this has led to some stabilisation in USD/JPY around the 118 level, we continue to look for a weaker JPY and target 124 on a 12-month horizon.