US hourly earnings data eyed keenly

Market movers today

Focus will be on the US employment report and we look for job growth of 235,000 in February in line with consensus. This is a slower pace than in the past six months but still solid. We expect the unemployment rate to tick down one notch to 5.6%. The details of the report will be important to watch â€“ in particular, average hourly earnings, which rebounded in January. A further acceleration in hourly earnings suggests that wage inflation is picking up. For some FOMC members, this is an important signal ahead of a rate increase, although we expect the most important members of the committee to be less focused on wage inflation when judging the right time for lift-off.
In the euro area focus is on the second release of GDP growth in Q4 14 together with the first release of the sub components. We expect that the stronger growth at the end of the year was driven by private consumption, which was decent in Q3 and has been further supported by the oil price decline.
German industrial production is also due for release this morning and we expect it to have continued to increase in January and at a faster pace compared to December. This progress should follow as uncertainty has faded and private consumption has prolonged its increase. Added to this, German production is supported by the weakening of the EUR.

Selected market news

Yesterday the ECB raised its GDP growth projection strongly. In 2015 the ECB now expects growth of 1.5%, up from 1.0% in the December projection, and in 2016 the new forecast is 1.9%, up from 1.5%. At the same time, the ECB raised its HICP inflation forecast for 2016 to 1.5% from 1.3%. This should reflect that the ECB expects the QE programme to support inflation and related to that the ECB foresees inflation at 1.8% on average in 2017. Note that the new staff projection is conditional on full implementation of all policy measures. Hence, although the ECB expects stronger growth and inflation close to 2% in 2017, Draghi still expects the QE programme to continue at least until September 2016.

In respect of the QE bond purchases Draghi said that it would start on Monday and that the ECB will be ready to buy bonds with yields as low as the deposit rate at -0.20%. The readiness to buy bonds with negative yields and the upbeat forecasts triggered a new rally in periphery bonds and also European equity markets performed strongly. The EUR came under renewed pressure against the USD and the Scandi currencies and we think that there is more of the same waiting for the markets. We continue to see value in periphery bonds, risky assets in general and see further downside for EUR/USD and expect that the cross will drop to 1.05 on a 6M horizon. For more on the ECB meeting see The ECB isfinally ready to buy bonds on Monday, 5 March.

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