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Optimism rebounds, might that stay the ECB’s hand?
Bourses have kicked on overnight, in part trading on the optimism inspired by yesterday’s late NY
Financial Times story suggesting that EU leaders are working on a plan to recapitalize the banking sector.
In Europe bourses played some catch-up following the 4% turnaround seen in US markets, with a 4.7%
rebound in financials leading the Stoxx600 to a 3.1% gain. A suggestion by the head of the IMF’s
European department that the IMF, if needed, could create an SPV and buy Spanish and Italian bonds
probably didn’t hurt sentiment, whilst Moody’s three notch downgrade of Italy’s credit rating to A2
(negative outlook) was largely anticipated. In the US, the dataflow showed some signs of resilience, at
least at the headline level, so that the S&P500 has just closed up a further 1.8%, led by the basic materials
sector. Whilst the dollar is little changed, the commodity currencies have strengthened. Credit spreads
have narrowed and yields have increased across the major bond markets as investors have become a tad
less risk averse. However, the VIX still sits a shade over 37.
As far as the dataflow is concerned the Euroland service sector PMIs were mildly disappointing with
Germany’s index revised down a further 0.6pts to a recessionary 49.7 and the French index revised down
a full 1pt to 51.5 (see our first chart). The peripherals continue to struggle, with the Italian index down
2.6pts to 45.8 and the Spanish index down 0.4pts to 44.8. As a result, the overall composite PMI was
revised down to 49.1, which as our second chart reminds is consistent with the mild recession that my
European colleagues are now expecting. In the UK the news was mixed. A downward revision to Q2 GDP
growth to just 0.1% qoq and revisions to prior history that point to a deeper recession than estimated
previously was balanced by a 1.8pt improvement in the services PMI to 52.9. In the US, ADP estimated a
91k increase in private payrolls in September, very similar to last month (see our third chart). Assuming
some job losses in the government sector, that might suggest that we should look for a about a 70k gain
in official non-farm payrolls on Friday, and indeed that is what my US colleagues are now calling (up from
the 50k gain they were forecasting previously). Indeed, considering that the Verizon strike pulled down
payrolls last month (not captured in the ADP data) one could argue for a stronger gain. However, whilst
the non-manufacturing ISM also showed a degree of resilience in September – declining just 0.3pts to
53.0 – we did note that the employment index fell to 48.7. That’s the lowest reading since June of last
year. As our final chart shows, the employment components of the twin ISM reports are pointing more
towards a repeat of the flat-line result seen in August, if not this month then next. We also noted a sharp
surge in layoff announcements recorded by Challenger, Gray and Christmas (the three month average is
up 105%), with Bank of America’s layoffs and layoffs in the military being a key driver of the September
outcome (which was the highest reading since April 2009).
Looking at the day ahead, with the UK’s composite PMI now only 1pt below its long-run average, we
think that the BoE will probably decide to make no change to policy settings today (our UK Chief
Economist continues to think that an increase in asset purchases will be announced next month, which is
also an Inflation Report meeting). However, with Euroland’s composite PMI at just 49.1, our European
economics team continues to think that the ECB will today cut its refi rate by 50bps back to 1% and
announce an extension of liquidity provision to the banking sector. By contrast polls indicate that the
consensus expects no move in the refi rate this month. The rebound in optimism over the last 24 hours or
so could convince the ECB to hold fire on a rate cut today, which recall is also President Trichet’s last
meeting before he stands down. Staying in Europe, Germany will release August factory orders (recall that
July orders were very weak), the Netherland’s Parliament will vote on the EFSF reforms and Spain is due
to issue bonds. In the US the focus will be on the weekly jobless claims report to see if last week’s 391k
reading was a statistical aberration as the DoL suggested.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Optimism rebounds, might that stay the ECB’s hand?
Bourses have kicked on overnight, in part trading on the optimism inspired by yesterday’s late NY
Financial Times story suggesting that EU leaders are working on a plan to recapitalize the banking sector.
In Europe bourses played some catch-up following the 4% turnaround seen in US markets, with a 4.7%
rebound in financials leading the Stoxx600 to a 3.1% gain. A suggestion by the head of the IMF’s
European department that the IMF, if needed, could create an SPV and buy Spanish and Italian bonds
probably didn’t hurt sentiment, whilst Moody’s three notch downgrade of Italy’s credit rating to A2
(negative outlook) was largely anticipated. In the US, the dataflow showed some signs of resilience, at
least at the headline level, so that the S&P500 has just closed up a further 1.8%, led by the basic materials
sector. Whilst the dollar is little changed, the commodity currencies have strengthened. Credit spreads
have narrowed and yields have increased across the major bond markets as investors have become a tad
less risk averse. However, the VIX still sits a shade over 37.
As far as the dataflow is concerned the Euroland service sector PMIs were mildly disappointing with
Germany’s index revised down a further 0.6pts to a recessionary 49.7 and the French index revised down
a full 1pt to 51.5 (see our first chart). The peripherals continue to struggle, with the Italian index down
2.6pts to 45.8 and the Spanish index down 0.4pts to 44.8. As a result, the overall composite PMI was
revised down to 49.1, which as our second chart reminds is consistent with the mild recession that my
European colleagues are now expecting. In the UK the news was mixed. A downward revision to Q2 GDP
growth to just 0.1% qoq and revisions to prior history that point to a deeper recession than estimated
previously was balanced by a 1.8pt improvement in the services PMI to 52.9. In the US, ADP estimated a
91k increase in private payrolls in September, very similar to last month (see our third chart). Assuming
some job losses in the government sector, that might suggest that we should look for a about a 70k gain
in official non-farm payrolls on Friday, and indeed that is what my US colleagues are now calling (up from
the 50k gain they were forecasting previously). Indeed, considering that the Verizon strike pulled down
payrolls last month (not captured in the ADP data) one could argue for a stronger gain. However, whilst
the non-manufacturing ISM also showed a degree of resilience in September – declining just 0.3pts to
53.0 – we did note that the employment index fell to 48.7. That’s the lowest reading since June of last
year. As our final chart shows, the employment components of the twin ISM reports are pointing more
towards a repeat of the flat-line result seen in August, if not this month then next. We also noted a sharp
surge in layoff announcements recorded by Challenger, Gray and Christmas (the three month average is
up 105%), with Bank of America’s layoffs and layoffs in the military being a key driver of the September
outcome (which was the highest reading since April 2009).
Looking at the day ahead, with the UK’s composite PMI now only 1pt below its long-run average, we
think that the BoE will probably decide to make no change to policy settings today (our UK Chief
Economist continues to think that an increase in asset purchases will be announced next month, which is
also an Inflation Report meeting). However, with Euroland’s composite PMI at just 49.1, our European
economics team continues to think that the ECB will today cut its refi rate by 50bps back to 1% and
announce an extension of liquidity provision to the banking sector. By contrast polls indicate that the
consensus expects no move in the refi rate this month. The rebound in optimism over the last 24 hours or
so could convince the ECB to hold fire on a rate cut today, which recall is also President Trichet’s last
meeting before he stands down. Staying in Europe, Germany will release August factory orders (recall that
July orders were very weak), the Netherland’s Parliament will vote on the EFSF reforms and Spain is due
to issue bonds. In the US the focus will be on the weekly jobless claims report to see if last week’s 391k
reading was a statistical aberration as the DoL suggested.
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