All Eye on the ECB and BOE Meetings

By Roger Baettig | July 05 2012 3:07 AM

Trading was quiet with the US markets closed on Independence Day. European bourses weakened after receiving disappointing economic data. While the Eurozone services PMI contained pleasant surprise, the data in Germany and the UK were disappointing. Investors' focus today is on the ECB and the BOE meetings. Both central banks are expected to announce new measures in response to the prolonged fatigue in economies. Crude oil weakened in Asian session on Thursday as refineries in China said they would cut output in July due to weak demand. A Reuters survey showed that refineries making up over 30% of China's oil capacity are planning to cut crude processing runs in July (to 2.88M bpd from 2.94M bpd in June) due to sluggish demand, poor refining margins and high fuel stocks.

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The Eurozone PMI services index climbed to 47.1 in June, up from 46.8 in May. The reading in Germany dropped -1.9 points to 49.9 in June. The readings in France and Italy climbed higher to 47.9 and 43.4 respectively. In the UK, the services PMI stayed in expansionary territory but fell -2 points to 51.3 in June. Retail sales in the Eurozone surprisingly gained +0.6% m/m in May. However, on annual basis, retail sales still dropped -1.7%. These data indicated that that the economy in European countries remained weak and is in need of stimulus.

The ECB and the BOE will hold meetings regarding monetary policies today. The ECB is expected to cut the main refinancing rate by -25 bps to 0.75% and the deposit rate by -15 bps to 0.1% at the July meeting. The forecast has taken into account policymakers' concerns about taking the deposit to 0% which would inhibit credit creation and increase financial instability. Other than rate cuts, the ECB would probably not add unconventional measures this month.

The BOE is almost certain to raise the size of asset purchases by 50B pound 375B pound at the July meeting. The MPC members last month voted 5-4 to maintain the asset purchases unchanged. Those voted against additional easing would like to gauge the impact of the emerging 'Funding for Lending', i.e. the Long Term Repo Operation (LTRO), but believed that further easing would be necessary in the future. Inflation in the UK has eased significantly in recent months. Headline CPI moderated to +2.8% y/y in May from +3.0% in April and above +5.0% in late 2011. As the price pressure faded away, this removed a hurdle for policymakers to ease further.