Markets look to ECB meeting

• ECB unlikely to start QE but could see some tweaking of policy
• US payrolls report to show labour market continues to improve
• Other central banks, including BoE, expected to leave policy unchanged

Market moves over the past week have primarily been driven by geopolitical developments and speculation around whether the ECB will ease policy again. News of fighting in the Ukraine sent equity markets down on Thursday, although they subsequently rebounded and ended up on the week. Bond prices, even in the US where the economic news has largely been positive, edged higher. Meanwhile, the US dollar continued to advance, moving below 1.32 against the euro for the first time in 11 months. Geopolitical developments will continue to be watched closely, but the ECB policy meeting (Thurs) will also be a focus for markets.

ECB President Draghi’s dovish speech at the Jackson Hole symposium has fuelled speculation the ECB may be set to announce further measures to stimulate growth. Draghi drew attention to a market measure which showed medium-term inflation expectations have fallen below the ECB’s 2% target. This boosted expectations that the ECB may be close to considering some form of QE. Friday’s “flash” euro area inflation estimate for August, which saw the core measure rise modestly to 0.9% (from 0.8% in July), tempered some of this speculation. However, markets seem convinced that it is only a matter of time before some further measures are announced.

The probability of significant new action arising from the coming week’s ECB meeting is low. However, some economists are looking for another interest rate cut. It seems unlikely that the ECB will announce a new package before implementing the last one, although the TLTRO programme could itself be tweaked. Otherwise, we think Draghi will confine himself to discussing the ECB’s options, which may include further hints of QE. The likely downgrade of the ECB’s economic forecasts may add to expectations of future action.

In the US, the August payrolls report (Fri) will as usual be the key release of the month. Fed Chair Yellen’s speech at Jackson Hole indicated a shift in her view of the state of the labour market, with an increased emphasis placed on signs of improving conditions. The latest labour market report is unlikely to be inconsistent with this. We forecast payrolls rose by 235k in August, close to the average monthly rise so far in 2014, while the unemployment rate is expected to fall back to 6.1% equal to its post-recession low. Earnings growth is likely to remain subdued, but with Yellen indicating that the Fed may not wait for wages to pick up before starting to raise interest rates, this may now be seen as less important by markets. Other key US data next week include the manufacturing (Tues) and non-manufacturing (Thurs) ISMs. Given the high levels reached in July even a modest pullback in August would still be consistent with strong Q3 GDP growth. Construction spending (Tues) and international trade (Thurs) usually get less attention. However, both are used to calculate GDP and so will give some guidance on Q3 growth.

The Bank of England’s September MPC meeting is unlikely to generate much excitement as it is almost certain that policy will be unchanged. Admittedly, two members voted for an immediate rate increase at the last meeting. However, while we are forecasting that policy rates will start to rise from early next year, there is no reason to expect that the majority view will have shifted over the past month. This week’s UK data is unlikely to change views on the health of the economy with the August PMIs expected to remain consistent with robust GDP growth in the second half of 2014(see back page).

There are also central bank policy meetings in Australia, Canada, Japan and Sweden. None of these are likely to result in immediate policy action.