While Greek default concerns may have been slightly eased by Germany ratifying the EFSF amendments, another proverbial spanner was thrown into the works by the Eurozone CPI estimate coming in 0.5% higher than expected. All eyes therefore will be on the ECB rate decision this week and the ECB's reaction to the latest developments. Bank of America speculated that the ECB may take the drastic action of a 50BPS cut, while analysts have noted comments from ECB's Nowtony who said that interest rate cuts cannot be ruled out. The unexpectedly high inflation number has increased the uncertainty about the rate decision, with added focus on the non-standard measures the ECB could use such as LTRO's; the final denouement being Trichet's last press conference before he hands over the reins to Mario Draghi.
In the UK, there will be the final Q2 GDP reading which precedes the BoE's rate decision. The key rate is expected to remain unchanged but again there is a possibility of a surprise in the form of quantitative easing. Alongside the usual recent doveish comments from BoE's Posen, MPC member Spencer Dale has said he was pretty sure QE would work again if the BoE decided to do more. Further pressure has come from Business secretary Vince Cable who has called on the BoE to stimulate the economy, with many analysts speculating on a figure of GBP 50bln additional QE to be announced this week with more to follow. The GDP reading may however, either force the MPC's hand or provide a stop-gap form of relief until the next meeting.
Within the Eurozone there is a relatively large supply of debt coming to the market with Spain tapping three bonds and given another poor showing of Italian debt last week focus will be on whether Spain can build on recent positive auctions as the country's 10-year cash bond yield has moved gradually back to the key 5.00% mark. Germany will also be conducting a Schatz auction which will be watched keenly due to the technically uncovered Bobl auction last week.
Across the pond, Operation Twist begins with the Fed buying up to USD 11.25bln at the long end of the curve but only selling up to USD 9bln at the short end. Finally, this busy week will be rounded off in style by the release on Friday of US non-farm payrolls.
