German manufacturing PMI declined from 53.2 to 52.1

Market Movers

• Focus to remain on central-bank responses to recent market turmoil with notably the Fed and Bank of Japan meetings this week. Today both ECB’s Draghi and Lautenschlager are set to speak, which could make for some further policy-maker reflections following last week’s signal from the central bank that the ECB will cut rates again in H1.

• Main release today is the German IFO expectations, which should be followed closely to judge any impact on economic sentiment of the latest market jitters. We look for a drop in ‘current conditions’ but a rise in the ‘expectations’ component. Last week the German manufacturing PMI declined from 53.2 to 52.1, driven mainly by weaker export orders. Overall, downside risks to our expectation of higher euro-area GDP growth are continued financial uncertainty and global weakness but our expectation of higher GDP growth is due mainly to higher domestic demand and, so far, the euro area has remained rather resilient to the weakness in emerging markets.

Selected Market News

Risk sentiment has continued to improve with Brent oil now trading around the USD32.50 mark, equities up 1-2% in the Asian session and most major currencies stronger against the USD overnight. While the oil-price rise was partly driven by the US snowstorm hitting the east coast and comments in Davos from Saudi Aramco that 30- dollar oil is ‘irrational’, it does seem that the optimism that was sowed last week by ECB’s soft message has carried over to the start of this week. Notably, a range of major banks have been out declaring that now is the time to go against the sell-off – and we broadly agree.

Crucially, this week will see policy meetings at both the Fed (Wednesday) and the Bank of Japan (BoJ) (Friday). On the back of the ‘re-re-collapse’ in the oil price and global financial turmoil we think the Fed will leave rates unchanged and deliver a dovish tone in the released statement. That said, as markets now only price in one hike for 2016, any indications of March being a ‘live’ meeting for further rate hikes would be interpreted as hawkish.

We also expect the BoJ to leave policy unchanged but the probability of additional easing has increased substantially, not least on the latest appreciation of the JPY, the lower oil price and concerns that the ‘shunto’ spring wage negotiations may disappoint. Comments from Kuroda on Friday afternoon do, however, in our view hint that the BoJ is not ready to deliver more easing at this stage.

Thus, while we think the Fed will echo the ECB with a dovish message this week, do not look to BoJ for comfort to risk assets just yet.

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