PMI data to halt European rally

Stock markets enjoyed their best day’s performance of the year on Friday following some positive movements from EU politicians to contain the problems of rising debt yields in Spain and Italy. Thursday night also saw some relaxation of the rules surrounding the use of EFSF bailout funds for Spanish banks although Angela Merkel was at pains to stress on Friday that she believed that such measures should come with attached conditionality i.e. austerity measures. She’ll still have her day we feel.

We can now, at least for a time, slip away from European politicians and their views and focus back on the macroeconomic data which, unfortunately, still remains a thorn in the side of the entire Western world and not just Europe.

The first week of the month is always chocca with macro data and this is no exception. We started over the weekend in China with the most recent manufacturing PMIs which showed a continual slowing in the country’s engine room. While some of this is coming from China itself it is obvious that the slowdown in Europe and the US are the main determining factors. The fears over China will not go away until this figure, amongst others, starts to retreat higher however that is out of Chinese hands to a certain extent. That being said, we do expect the authorities to throw more and more stimulus at the Chinese economy through the 2nd half of the year.

The schedule of manufacturing releases sweeps through Europe, the UK and the US throughout the session with only the US number expected to show any growth. The rest are simply a case of “how bad can they be?” with the figures from France, Italy, Spain and Germany the closest watched.

The forthcoming data from western, and indeed the world economy, in the coming few days is unlikely to silence any of the people out there looking for further QE or looser monetary policy in the coming months. The Bank of England are expected to throw between £50-£75bn at the QE program at their meeting on Thursday. We think that they will go with the higher figure as firstly, the economy needs the larger amount and secondly, the timeframe would fit nicely with the schedule of the November inflation report and the speed at which the Bank tends to allocate these funds.

The ECB decision is a little more difficult to pinpoint but we would like to see a 1-2 punch from the authorities in Europe. The first was last week’s meeting taking some of the pressure off the periphery, the second would be some form of interest rate cut from the board. They are due to meet on Thursday at 12.00 and we expect a 25bps cut from the boys in Frankfurt.

Currency movements have been quiet over the Asian session and I think that the rally in risk is likely to be done within the next 24/48hrs. There is a still a lot of deserved scepticism surrounding the situation in Europe and we think the general declines in Europe will see risk taken off the table as we move through the week. Just to put things in perspective Friday saw the largest euro gain versus the dollar since Oct 2011 on the day that EFSF leverage and the Greek PSI participation was agreed. It didn’t last.

Have a great day.

Summer months are typically quiet but with everything rocking from Italy to Spain via the US and UK there is little belief 2012 will follow in the same vein. As we move into the 2nd half of the year we will outline our beliefs of where the pain and pleasure will be found in the next 6 months while taking you through the latest measures designed to help the world economy.

Join us for this run down with World First’s award winning Chief Economist Jeremy Cook also deciphers the impact of the morning’s Bank of England and ECB announcements.

Latest exchange rates at time of writing

Rates are dependent on amount transacted.