Euro area GDP growth forecast for 2016 considerably lower from 1.8% to 1.5%

Market Movers

• After several days of focus on the global manufacturing sector focus today turns to the service sector outlooks. While we look for a drop in service PMIs in Spain and Italy, we expect the final euro area print to stay unchanged at 53.0. In terms of January retail sales in the euro area we expect a moderate increase due to the lower oil price, progress in the labour market as well as solid consumer confidence.

• Note that yesterday we revised our euro area GDP growth forecast for 2016 considerably lower from 1.8% to 1.5% (consensus 1.6%). The downward revision is mainly due to external factors that add uncertainty and hence are headwinds to business investments, while also keeping export growth subdued.

• In the UK we expect the service PMI survey to show a small decline, suggesting that the UK economy might slow down somewhat in the coming quarters. However, we expect levels to remain decent and well above 50, thus pointing to positive growth.

• In the US, the ISM non-manufacturing is due and it will be interesting to see whether the decline in the index over the past three months has continued in February. The service Markit PMI came out very weak last week with a decline of 3.7 points to 49.8, which places downside risk on ISM non-manufacturing. We estimate the index declined to 52.9, indicating a slower but still solid growth in the service sector. We will also get the final releases of service PMIs and durable goods as well as the weekly jobless claims figures.

Selected Market News

US ADP data yesterday suggested that private payrolls increased 214,000 in February. Although the ADP release does not have a perfect fit with actual NFP, it does give upside risks to our below consensus call of 160K in total payrolls on Friday. Not long after the release Fed’s Williams (non-voter, neutral) expressed that he only expects the rate path to be changed ‘slightly’ at the upcoming Fed March meeting as ‘the big picture has not changed’. Amid falling US recession fears short US rates have taken another move higher with 2Y US swap rates completing a 15bp rise in only four days.

The release of the Fed’s Beige Book (based on information collected before 22 February) suggests that while most of the US economy continues to expand at a moderate pace, wage growth within the economy varies considerably ‘from flat to strong’.

Danmarks National bank purchased DKK8.4bn in FX intervention in February, which was slightly higher than indicated by the net position. Intervention likely took place in the first half of the month when EUR/DKK traded at an elevated level. With the recent drop in the cross below the central rate it makes it a close call if Nationalbanken in our base case will mirror a 10bp rate cut from the ECB next week.

As expected the Spanish parliament rejected the Socialist Party’s government proposal.

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