Market commentary: Growth expectations brought down by 0.3% for 2015

Yesterday the markets were caught in-between geopolitical concerns, strong US labour data and a new reminder that European growth and inflation will be lower than previously expected.

Starting with the latter, the ECB yesterday published its monthly bulletin which included a survey conducted among economists and which unsurprisingly concluded that the group of 61 experts cut their forecasts for growth and inflation. The growth expectations for 2015 were brought down to 1.2% from 1.5%, while the inflation projection was trimmed by 20bps to 1%.  

In a bid to stress that these downgrades were foreseen, the publication reiterated Draghi’s commitment to act as applicable “should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate." As a side note, the ECB will be updating its own forecasts next month.

Meanwhile, on the geopolitical front, throughout the day we saw headlines that confirmed that the conflict in Ukraine is aggravating and that the Western leaders are yet again voicing their concerns around Russia’s implication.

To add to the tension, Ukraine suggested that it might not abide by the gas agreement reached just a few weeks ago, as it could speculate that the demand will be kept at bay by a milder than normal weather "Imports will depend on the weather and on consumption."  Against this backdrop, European equities fluctuated to close a few basis points higher.

On a more positive note, this morning the growth figures for Germany and France were published, with the former confirming a strengthening to 0.1% in q3 (from -0.2% in Q2) and the latter surprisingly on the upside (0.3% versus expectations for a 0.1% growth).  The data for Eurozone will be published later on today.

Moving across the Atlantic, the data reported yesterday marked a break from the consecutive above expectations readings in weekly unemployment claims although the disappointment was not large enough to upset markets; indeed, the applications for unemployment benefits amounted to 290k over the previous week, still below the 300k that is commensurate with a strengthening labour market.

In a separate report, it was disclosed that the number of job openings declined to 4.75 million in September, from 4.85 million in August, lower than expected but still the second best figure since 2001. In the same vein, there were concurrently indications that employees are becoming increasingly comfortable with the market conditions as the number of resignations reached 2.75 million, the highest since April 2008 (as a percentage of workers).

However, today we will be looking into the retail sales data to judge whether these changes in the labour market have translated into higher consumption; spending and wages have been lagging behind and, as the macro conditions elsewhere continue to remain weak, have become increasingly important for supporting the positive momentum in the US. On another note, today several Fed officials are due to deliver speeches and the earnings reporting season continues.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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