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Main News Daily Update

There are some economic figures due out today in the US, Canada and Europe. In the US, factory orders will dominate. In Europe, the focus will be on the ECB, where we look for rates to be held at 1%. In the UK, attention will be on the decisions of the Monetary Policy Committee (MPC) on interest rates and on quantitative easing (QE). The decision on the short term official interest rate is universally expected to favour a hold, at 0.5%. But with QE now at the £200bn limit agreed with the Treasury and the Chancellor, the MPC has a more difficult decision to make about whether to extend QE, to pause or to bring the program to an end. Some argue for continuing QE on the basis that money supply is weakening, the economy is barely growing and that gilt yields will rise sharply unless it continues. Others argue that with CPI inflation at 2.9%, asset prices recovering and signs of economic growth returning, it is time to start to withdraw some of the monetary stimulus. Lloyds favour a continuation of QE but any vote will likely be split. In the United Kingdom, Bad weather lowered CIPS services to 54.5 in January. In January, the business activity index in the services sector fell to 54.5, reaching a five-month low. It was above the 50-mark for the ninth consecutive month. Business optimism improved with output expectations reaching their highest level for four months. The panel reported that uncertainty concerning fiscal policy after the general election which should be held at the latest in June could weigh on activity in the coming months.

In the Eurozone, Services PMI eased to 52.5 in January. Activity in the services sector continued to expand in January, albeit at a slower pace than in the previous two months. According to the final reading of the services PMI survey, the business activity index came in at 52.5, down from 53.6 recorded in December. However, the details of the survey were more encouraging. Business expectations continued to increase, reaching its highest level since April 2008, signalling that a rebound next month is likely. Nevertheless, perspectives over the medium term are more uncertain. Domestic demand, the main driver of services sector activity is likely to remain subdued throughout the year. Combining activity indices in both manufacturing and services sectors, the Composite PMI for activity, a leading indicator of GDP growth, came in at 53.7, down from 54.2 recorded in December. The index was still consistent with expanding activity, but it highlighted that the ongoing recovery is losing momentum. The EU Commission has endorsed Greek fiscal consolidation. EU Commissioner Joaquin Almunia said that Greece should implement further spending cuts and possibly add new taxes to improve the fiscal situation in the country. To promote credibility about the budget consolidation, the EU Commission will monitor Greek budget cuts closely on a continuous basis. Greek markets have thus far reacted positively to the Commission’s comments. The ECB is expected to keep its refinancing rate unchanged and Jean-Claude Trichet is expected not to signal any rate hikes for the near future. We expect the tone at the press conference to be broadly unchanged from the January meeting and Trichet is likely to reiterate that the road ahead is a bumpy one. The monetary analysis does not give much reason to lean against the wind, as yet, although the quarterly lending survey – scheduled to be published on Friday – is likely to show that credit tightening has come to an end. The European Commission’s endorsement of the Greek austerity plan and the close monitoring planned has given some comfort to the markets. The ECB is likely to support the measures put forward and could also emphasise that other countries should quickly come forward and begin to implement ambitious reform programmes. We will have to wait for the March meeting to get more details on the exit strategy for non-standard measures and new ECB staff growth projections.

In the US, The ISM survey pointed to stable non manufacturing activity in January (NMI at 50.5) The Non-Manufacturing Index (NMI) calculated by the ISM improved in January, to 50.5 from 49.8 in December.
Last autumn, it had temporarily picked up above the 50-mark. In January, the index suggested again that the contraction of activity in the non-manufacturing sector has ended. During the same month, the PMI index,
calculated from the manufacturing ISM survey, surged in January to 58.4. All these above confirm the ongoing recovery in early 2010, but outline that activity is accelerating only in the manufacturing sector. The ADP survey signalled only 22,000 job losses in the private sector in January, after 61,000 in December. BLS estimates should confirm this improvement trend and may signal almost flat payrolls in January after -85,000 in December.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.