ECB to resist mounting pressure for further stimulus

• Draghi to resist pressure for further policy loosening
• UK Autumn Statement to show further fiscal slippage, MPC on hold
• US payrolls set to indicate ongoing labour market tightening

Global disinflationary pressures build...With yesterday’s OPEC decision to maintain its official 30mb/d quota, markets will continue to digest reactions to the potential disinflationary impact of further oil price falls. Markets will also be kept busy next week by the ECB policy announcement and US nonfarm payrolls, while the domestic agenda will be led by the Chancellor’s Autumn Statement and MPC policy meeting.

ECB to withstand pressure for action... With euro area headline inflation for November falling to 0.3% y/y from 0.4% in October, the final ECB policy meeting of the year takes place amidst signs of further downside price and activity pressures. While President Draghi might take some comfort from the core rate (which excludes food and energy) remaining unchanged at 0.7%, the prospects of further oil price weakness and prolonged stagnation are set to raise hopes for policy action. Our central expectation is for Mr Draghi to reiterate his recent position that while all options remain on the table, it remains prudent to assess the effects of the ECB’s current stimulus package of targeted bank liquidity as well as purchases of covered bonds and asset-backed securities. However, there is some risk of an immediate response.

Chancellor sings the autumn blues...The Autumn Statement on Wednesday will see George Osborne deliver some new fiscal arithmetic. An unexpectedly low pickup in tax receipts, partly reflecting subdued pay growth despite a strong rise in employment, the slowdown in the housing market and the recent fall in the oil price means that 2014/15 net borrowing is set to be around £14bn higher than envisaged by the OBR at the March Budget. Consequently, we expect the Chancellor to push out the date by when he expects to realise his ‘fiscal mandate’ of a cyclically-adjusted budget balance from 2017/18 to 2018/19. The slippage also limits his ability to offer any significant pre-election giveaways.

BoE to hold firm...Thursday’s policy meeting is likely to see the current MPC stance maintained. The minutes of the November meeting indicated that there was a range of views among the majority with some members worried that the pace at which economic slack was being eroded might be faster than previously thought. While this may suggest a tilt in the MPC’s centre of gravity towards the McCafferty/Weale camp, we do not expect any change in the recent 7-2 voting pattern when the minutes are published on December 17. The domestic releases ahead of the MPC decision, which include the November manufacturing (Mon) and services PMIs (Wed) as well as October borrowing and mortgage approvals (Mon), are expected to chime with recent indications of a moderate slowdown in the pace of activity during Q4.

US unemployment rate set to fall again...The November payrolls report, which is the last one before the next Federal Reserve policy meeting, also on December 17, is expected to reaffirm the strength of the US economy. We anticipate a 230k gain which is stronger than the consensus. Data for October indicated a further tightening in the labour market, with the unemployment rate unexpectedly falling to 5.8%, despite a small rise in the participation rate. However, pay growth remained subdued. We expect another fall in the jobless rate to 5.7%, while average annual pay growth is anticipated to tick up to 2.1%. Meanwhile, the latest batch of ISM monthly indicators is expected to reaffirm recent evidence on the ongoing robust pace of activity.

There are also central bank policy meetings in Australia and Canada. Neither of these is expected to result in a change in policy.