Week Ahead & in Review: EU-US Decoupling

Week in review: US and Europe continued to decouple this week. In the Euro area, inflation turned negative falling to -0.2%yoy. This was mostly due to lower oil prices, but the ECB is concerned that it could affect inflation expectations, particularly wage negotiations, leading to widespread deflation. Activity and confidence data was not much brighter, with the European Confidence Indicators remaining stable at 100.7 and the unemployment rate stable at 11.5%.Meanwhile, the Bundesbank has halved its forecast for German growth next year to 1 per cent, after 1.4% in 2014, adding to the gloom. In June, it had expected growth of 1.9% this year and 2% next year.

Recent figures have added pressure on the ECB to start buying sovereign bonds, though the potential effects on the economy are doubtful. In any case, Bloomberg has reported that ECB staff has presented to the Council a plan to buy EUR500bn worth of investment grade debt, with a separate plan for non-investment grade debt such as that of Greece and Cyprus.  The ECB is due to decide on 22 January, ahead of Greek elections on 25 January, which may complicate the decision process.

In the US,  non-farm payrolls were up 252 thousand, better than expected, after rising 353 thousand in the previous month. The data is consistent with strong continued recovery late last year and should add pressure on the Fed to hike rates earlier than planned.

In Portugal, the unemployment rate rose to 13.9% in November, further indication of a slowdown or mild contraction in Q4. Macrometria has revised its Q4 GDP growth to -0.1%qoq.

Week ahead:

  • Tuesday 13 January: Portugal’s December CPI inflation – inflation has been rising gradually in the last few months to -0.2%yoy. Oil prices are likely to push it down again this month.
  • Thursday 15 January: German annual 2014 GDP – Market anticipates GDP growth of 1.5% in 2014 as a whole, it should give some indications as to how Q4 GDP, not yet released, has fared.