ECB close to a rate hike

(04.03.2011) ECB hinted yesterday that the signal rate could be hiked, maybe already in April. This caused a clear strengthening of the euro. Today focus will turn to the US payroll data for February.

By Knut A. Magnussen, Senior Economist at DNB Markets

illustration euroAs expected the ECB did not change the signal rate yesterday. However, governor Trichet gave strong signals that a rate hike may be just around the corner. ECB reckons that inflation risk is now on the upside and the central bank has upped the growth forecasts for the two coming years somewhat. Trichet did not repeat that the refi rate is appropriate but said that “strong vigilance” is needed. This rhetoric has been used on earlier occasions to indicate that a rate hike is imminent.

However, Trichet also said that an April hike would not have “the sense of the start of a series of rises”. Hence we think there will be some “symbolic” hikes in order to secure that inflation expectations are well anchored. In addition we think that ECBs growth forecasts are too optimistic.

The euro reacted promptly
by appreciating and the EURUSD was traded close the to 1.40 yesterday afternoon. The NOK also lost ground vs the euro and EURNOK is traded close to 7.78 this morning, up from 7.69 yesterday. European interest rates also rose markedly on this event. The macro data released yesterday confirmed that the recovery is ongoing in the eurozone. Retail sales grew 0.4% in January, somewhat more than expected. In addition the detailed GDP data for Q4 showed that consumer demand rose by 0.4% - the strongest quarter since the autumn of 2007.

US macro data were also strong yesterday. The ISM for non-manufacturing rose further from a high level and almost reached 60 – a level normally consistent with GDP growing (y/y) by 4%. Initial jobless claims fell for the second month in a row and reached the lowest level (368.000) since June 2008.

Today the important payrolls data are due and they may as well surprise on the upside. After weak growth in January (36.000) employment is expected to rise by almost 200.000 in February. The negative weather effects will not be repeated. In addition stronger data for initial claims, ISM employment indices and the ADP report all points at fairly strong growth in employment. A strong reading for employment does not obviously imply a further drop in unemployment. The unemployment rate fell by 0.4%-points in December and January. However, the drop in January was caused (partly) by revisions to the labour market data. Hence, we would not be surprised if the unemployment rate is rising somewhat in February.

British service PMI (CIPS) fell somewhat in February. However, the strong January data was a rebound after the very weak reading in December, caused by the snow.  The level of the index (52.6) still points at expansion and the manufacturing sector is a lot stronger. Hence it seems likely that the economy will recover somewhat in Q1 after the weak Q4.

The Norwegian oil investment survey for Q1 was released yesterday. The 2011 forecasts were lowered almost by 10 bill. NOK to 141. However, most of the downward adjustment was undertaken because the plans have not been formally approved yet. Hence, it still seems likely that oil investments will contribute significantly to mainland GDP growth this year. Norges Banks estimate from October was 7% in real terms. It is not obvious that this will be adjusted upwards in the upcoming report 16 March.