The Current Market Sentiment‏: Awaiting ECB's Deceision

The market will be waiting today for the ECB’s interest rate decision which is widely expected to keep the interest rate unchanged by 0.75%. There can be a move to have this decision by majority, not unanimously, as was done in the last meeting on December 6, which caused the single currency to go down to 1.2882 versus the greenback. This also happened in the two recent meetings because of the weak economic data which was coming out of the euro zone and the inflation easing down by this economic slowdown.

So, there can also be another down revision today of the inflation and the economic growth in the Euro zone by the ECB after it had lowered its expectations of them by the beginning of this year when it has announced that the inflation is to be down in 2013 from 1.1% to 2.1%. This is giving wider range for 2014 to be from 0.6% to 2.2% and it has lowered its EU GDP expectation of 2012 to be from -0.4% to -0.6% and for 2013 to be from -0.3% to -0.9%, expecting a turning back to the positive territory in 2014 to be from 0.2% to 2.2%.

We have seen actual easing of the EU CPI flash reading of February to 1.8% while the ECB yearly target stands at 2% and we have seen also maintaining of the EU GDP shrinking in the fourth quarter of 2012 at 0.6% q/q and 0.9% y/y in the second reading of it led by q/q falling of EU exports by its fastest pace in 4 years by 0.9%.

We have also seen rising of the unemployment rate to 11.9% in January in the euro zone and falling of February EU PMI composite to 47.9 from 48.6 in January showing persisting existence in the contracting territory below 50.

While there is a bigger probability today to have an action by the MPC from England after the MPC's recent meeting, minutes on the 7th of last month's meeting have shown more followers for David Miles, who has voted on the 10th of last January alone in favor of increasing BOE’s assets purchasing plan by another Stg25B to be Stg400B. But the majority kept it unchanged despite Marvin King's adoption of Miles’s view beside Fisher against the other six members.

As the data, which have come later from UK, have shown significant drop of the economic activity as UK PMI Manufacturing index has dived into the contraction territory reaching to 47.9 in February, UK retail sales have slumped by 0.6% yearly and monthly in January and ILO Unemployment rate rose to 7.8% again. That’s why King has seen, as he has said, that there can be space for another stimulation step with this current growth downside risk causing the current slowing down pace and it is less probable to cause rising inflation threat despite BOE’s recent expectation of having the yearly inflation rate above its target at 2% for the coming 2 years.

From the other side, there are emerging signs of the stagflation risks again in UK which cooled the BOE role in 2011 when the economy was depressed while the prices were rising, bringing UK CPI above 4% y/y all over 2011, months before reaching 4.8% in September 2011 before easing back again. This gave BOE a leeway to stimulate the economy again in 2012 by pushing liquidity into its APP to reach Stg375b as the yearly inflation rate have come under pressure in UK after diminishing the impact of the standard rate of VAT increasing for underpinning the governmental resources to 20% from 17.5% on January 4, 2011. This has contributed in raising the inflation by about 0.75% yearly over all the months of 2011.

While cutting the taxes in UK is ruled out currently, especially after Moody’s downgrading of UK to Aa1 from AAA showing that there can be a financial cooling down besides a monetary cooling too, BOE is looking more closely at the issue of rising prices to stimulate growth or anchoring prices, and an economic depression, by a tightening action.

You can see a clear negative impact of these conditions on the wages in UK which came down to the lowest rate since 2003 to 11.21 pound per hour, showing lower prosperity amid continued rising of the prices dampening the British citizen's confidence in spending.