Eurozone: Leading indicators weaken further

Eurozone: ECB Meeting to provide details on purchase programs

Eurozone: Leading indicators weaken further

US: Labor Market Data to determine interest rate expectations

Eurozone – ECB Meeting

For the Eurozone, the most important event next week will be the ECB’s monetary council meeting on Thursday. At the beginning of September, meeting details on the purchase programs for ABS and covered bonds were announced for the coming meeting. The crucial factor will be how the criteria for eligible securities are set. Consistent with its mandate, the ECB needs to avoid any credit risk; accordingly, the criteria for the ratings will be set high. However, this limits the potential volume of purchases further within already relative small markets. As a result, markets might be disappointed. This is even more likely, as the ECB will not announce the envisaged total volumes of asset purchases, which can be concluded from statements made by ECB Vice President Constancio only a few weeks ago.
So, markets might assess little impact of the measures in place so far and this could fuel speculation on broad-based asset purchases in the future.
However, we do not expect any new hints in this direction from ECB President Draghi at the upcoming meeting. At the same time, markets might get some indications on the likelihood of further monetary stimulus from the assessment of the first TLTRO by Draghi, about which he definitely will be asked at the press conference.

Eurozone – economy/PMIs

The PMI flash estimates for September have declined slightly and show a prolonged divergence between the service sector (stable trend) and industry (declining trend). In Germany, the survey data indicates subdued growth for 3Q14 compared to 2Q14. The French poll data in 3Q14 has on average dropped and now indicates a shrinking economy for 3Q14. For the entire Eurozone industry, 3Q14 survey data declined on average and the weak dynamic currently points towards stagnating industry production for 3Q14. The service sector poll data so far implies slight growth.

Furthermore, consumer confidence for the Eurozone is also declining.
Based on flash estimates for September, consumer confidence declined further and data 3Q14 on average now ranges well below 2Q14. We thus expect no positive impulse for the Eurozone economy from consumption.

In our view, based on current available indicators, slight negative growth of the Eurozone economy in 3Q14 is very likely. This is in line with our recently significantly lowered Eurozone growth forecast of 0.6% for the FY14. We, however, consider this a temporary weakness on the road to a modest recovery. In 2015, we expect that the finalization of the banking review, as well as the targeted measures from the ECB (TLTRO) and the weakness of the euro should support the Eurozone economy. Nevertheless, the pressure to execute reforms remains high for countries like France and Italy, since economic weakness in connection with low inflation exerts pressure on public finances. After France already missed its deficit targets, according to media reports, Italy will have to scrap its deficit targets for 2014 and 2015 next week as well. We expect that, in such an environment, the question regarding debt sustainability could come back into focus for markets.

US – Labor Market Report

Next week’s US labor market report will be crucial for interest rate expectations. The upcoming release should either confirm or fuel interest rate expectations, in our view. Data that calms the already moderate interest rate expectations is hard to imagine. Currently, markets expect the unemployment rate to have remained unchanged in September and a monthly non-farm payrolls increase slightly below this year’s average. So, expectations are not set high. Better numbers would confirm opinions (including ours) of a tighter labor market and earlier interest rate hikes than is currently seen by the FOMC and the majority of the market. The latter currently expects the first rate in 3Q15, while we aim for the end of 1Q.