Soft manufacturing data ahead of the ECB decision

The latest surveys from around Europe have provided further evidence of a global slowdown in economic activity with the manufacturing figures particularly worrisome. German manufacturing is often seen as a bellwether, not just of the EU but also globally, and news that the PMI reading has dropped into contraction territory for the first time in over 4 years is no doubt a concerning development. The figures will likely only serve to further heighten fears that the global economy is slowing down, and the focus will now turn to the first ECB decision of the year to see whether the bank first acknowledge the slowdown, and second, whether they attempt to provide some comforting remarks.

Eurozone economy continues to slowdown

At the same time as the German manufacturing figures we got the service sector equivalent and while on the face of it this was more positive in beating forecasts (53.1 vs 52.2), this was due in no small part to a sizable negative revision to the prior reading which now stands at 51.8 from 52.5 previously. Shortly before the German numbers, there was warnings signs from France with the services PMI for December dropping to 47.5 from 49.0 previously - a figure that was also revised down from 49.6.

This means the service sector has posted 2 consecutive months below the 50 mark which signals contraction and given that the two prior reading were around 55 it’s quite clear there’s been a sharp drop in this metric - quite possibly due in part to the gilet jaune protests. French manufacturing was rare bright spot in an otherwise dreary bunch of data, rising more than forecast to 51.2 from 49.7 prior.

On the whole this means that Eurozone wide figures for the manufacturing and services PMI both unexpectedly fell and came in at 50.5 and 50.8 respectively. The recent run in manufacturing is of greater concern with 11 of the past 13 months missing forecasts and its readily apparent that after a pleasantly strong 2017 the Eurozone economy is far from firing on all cylinders.       

ECB to follow the Fed in dovish shift?

The monetary policy announcement this lunchtime will be the first since the ECB ended their asset purchase programme and the markets will be keen to see whether they follow in the footsteps of their US peers in shifting to a more accommodative stance. The Fed has seemingly performed a pretty dramatic shift in their policy stance of late, which has caused the markets to now price in no further US interest rate increases this year, after believing there would likely be two just over a month ago.

The ECB are seen as highly unlikely to announce any policy changes today, with the focus being more on any comments regarding the timing of the first rate hike and the possibility of further stimulus (IE QE) should the economy require it. Market pricing currently gives less than a 50/50 chance that the bank will hike at all this year and with president Draghi’s term set to have run its course by October, there’s a good chance that the Italian won’t have delivered a single interest rate increase during his 8-year tenure.