Key events – BoE and ECB Rate Decisons

Main News Daily Update

In United Kingdom, Activity in services slowed in July. In July, the business activity index in the services sector fell from June, to 53.1 in July. It was nonetheless above the 50-mark for the fifteenth consecutive month. Overall, the reading on both CIPS surveys suggests the pace of growth already slowed at the beginning of Q3 from Q2 dynamic pace. With little hard economic data on offer, the highlights of the day are the interest rate announcements from the Bank of England and European Central Bank. Both central banks are widely expected to leave policy unchanged in August, but the decision in the UK, which is made in light of the latest Inflation Report forecasts, is potentially far more interesting. Recent data flow suggests that the Inflation Report will most likely contain an upward revision to the Bank’s inflation forecasts for this year and next. But forecasts for growth are unlikely to be moved substantially in either direction. This should give an MPC hawk like Andrew Sentance more confidence in pushing for higher interest rates and we expect him to vote for a 25bp rate hike for the third month in a row. But there is little to suggest that any of his colleagues will follow suit and over the next few months there remains a possibility that the bank may yet end up implementing further QE if economic growth stalls.

In the Eurozone, Activity in the services sector increased in July. The services PMI up to 55.8. Activity in the services sector increased in July, according to the final reading of the services PMI survey released this morning. The business activity index rose to 55.8 in July, up by 0.3 point with respect to the previous month. While at aggregate level the eurozone recovery is on track, at country level the picture is more heterogeneous. The country breakdown reported that July increase was mainly due to German performance. Country differences are even more accentuated when looking at the Composite PMIs for activity, which provide reliable GDP growth indicators. All in all, today’s data confirm that eurozone economy continues to recover. However, survey data signal that the recovery is mainly driven by the strong rebound of the industrial and manufacturing output. Services sector is suffering from the weakness of domestic demand. Danske expect this month’s meeting in the ECB Governing Council to be a non-event and we thus do not look for any major market movements. They expect the ECB to keep its refi rate unchanged at 1.0% and do not expect it to announce any new liquidity or other emergency measures. The ECB can take comfort in the latest market developments and economic news flow, which have been mainly positive. The debt crisis has faded, but there are still risks. The key risk would be that the ECB tightens its rhetoric, which could lead to higher money market rates and thus steepen the EONIA curve further. They expect a first interest rate hike from the ECB in H2 2011. Current market pricing, based on EONIA forwards, suggests a first hike around mid-2012. no change in policy is expected from the ECB where the focus will be on the afternoon press conference. Jean-Claude Trichet is expected to repeat that the ECB continues to be in the mode of ‘unlimited policy supply’ and will undoubtedly field questions about the recent appreciation of the euro and its effect on the region’s growth prospects.

In United States, Non-manufacturing activity stronger than expected in July, but growth prospects remain weak. Contrary to expectations, economic activity in the non-manufacturing sector accelerated in July according to today’s ISM report. The NMI index rose to 54.3 from 53.8 in the previous month. The employment index remained very weak. It rose to 50.9, compared to 49.7 in the previous month. Moreover, the prices paid index inched down to 52.7 compared with 53.8 in the previous month. Today’s ISM survey, in combination with the downward trend in the PMI for the manufacturing sector gives, further weight to a trimming of the Fed growth forecast. At the upcoming FOMC meeting on 10 August, the statement on the economy could be changed to reflect the weaker data. BNP Paribas expect that the Fed will not raise its policy rate until 2012.

No change in policy is expected from the ECB where the focus will be on the afternoon press conference. Jean-Claude Trichet is expected to repeat that the ECB continues to be in the mode of ‘unlimited policy supply’ and will undoubtedly field questions about the recent appreciation of the euro and its effect on the region’s growth prospects. Today data is due on Hungarian industrial production in June. Danske expect data to show that industrial production growth has eased to 11.6% y/y in June from 13.7% y/y in May. On Monday, we got surprisingly good PMI numbers in Hungary; nevertheless, they are not too optimistic about a recovery in the Hungarian economy. Also on the agenda today is the rate decision in the Czech Republic. The newly appointed governor of the Czech central bank (CNB), Miroslav Singer, will lead his first monetary policy meeting. Danske expect the key policy rate to be kept unchanged at 0.75%, as there is no pressure on inflation and the Czech koruna continues to move stronger.