LONDON (Thomson Financial) - A series of sentiment readings will take the spotlight in the euro zone this week, with markets alert to any signs of profound weakness that could shift the European Central Bank away from its unstintingly hawkish monetary stance.
A series of European Commission confidence surveys, as well as PMI activity readings on the manufacturing sector, will give some indication of how well the euro zone s economy is holding up against the headwinds of a strong euro, flagging US growth, and financial market turmoil.
However, pricing data are likely to illustrate the ECB s dilemma, with the headline rate of euro zone inflation expected to stay well above the central bank s target rate. Figures on euro zone money supply growth should give a further indication of inflationary pressures the ECB is trying to stamp out.
MONDAY, JAN 28
- The M3 measure of euro zone money supply growth is expected to remain steady in December. Economists say growth will be fuelled by market turbulence, because money market instruments become more attractive in times of uncertainty.
December s growth is seen at 12.2 pct, just off November s 12.3 pct increase. Money growth in the three months to December is seen at 12.2 pct in annual terms, up from 11.9 pct in the three months to November.
"Overall M3 is likely to have been buoyed by turbulence in financial markets in December, keeping the annual growth rate well into double digits," said Credit Suisse analysts.
"That strength may keep the European Central Bank s tone from moderating much in its February meeting," they added. The ECB, which considers money supply growth to be a potential inflation risk, is understood to be too concerned about inflation to cut interest rates any time soon.
- Private sector loans in the euro zone are expected to grow 11.0 pct in December, the same rate as in November.
TUESDAY, JAN 29
- France s consumer confidence index is expected to stay weak in January, with economists penciling in a reading of -30 compared with -29 in December.
"We expect households to remain relatively glum in the first month of the new year as they worry over President Sarkozy s commitment to his job and the reform process," said analysts at Moody s Economy.com.
- The Italian business confidence index is expected to moderate a touch to 91.0 in January, from 91.8 in December.
- The euro zone s current account surplus in November is seen narrowing to a seasonally-adjusted 0.4 bln eur, from 1.3 bln in October.
THURSDAY, JAN 31
- French producer price inflation is expected to edge down to 0.1 pct month-on-month in December, from 0.8 pct in November, while the annual rate is predicted to remain strong at 4.4 pct, up on the previous month s 4.2 pct.
BNP Paribas analysts say the recent rise in PPI "is entirely attributable to food and energy prices". They predict the annual rate will rise to 4.5 pct in December, "the highest since November 2000, though probably not yet the high point in the cycle".
- German labour data for January is expected to show unemployment still falling, although analysts warn that a deterioration is in the works as activity slows.
"While surveys of activity have continued to weaken, those covering employment intentions have yet to show much sign of deterioration ... while we do not view this as sustainable, the lags from surveys through to hard data imply that employment growth should hold up in the coming months," said BNP Paribas analysts.
"In the very near term, unemployment is likely to continue falling at a similar pace to that seen recently," they added.
The consensus view is for a drop in jobless numbers of 45,000, a smaller decline than December s -78,000 reading.
The employment rate is seen steady at 8.3 pct, a touch down on December s 8.4 pct, while the alternative ILO reading is seen at 7.8 pct, from 7.9 pct the previous month.
- Italian hourly wages in December are seen rising 0.3 pct from November s 0.2 pct, pushing the annual rise to 2.4 pct from 2.0 pct.
- The euro zone s flash estimate of HICP inflation is expected to come in at 3.1 pct, in line with December s reading and staying well above the ECB s target rate of around 2.0 pct.
"There are a number of factors that should affect inflation in January," said Credit Suisse analysts.
"The most significant downdraft should be from core inflation, which should drop on base effects from last year s rise in German VAT ... however, that should be more than offset by higher energy inflation - oil prices fell sharply last January - and a continued rise in processed food inflation," they said.
- The euro zone s unemployment rate is expected to moderate a touch to 7.1 pct in December from 7.2 pct in November.
- The European Commission s January confidence surveys are expected to show sentiment continuing to sour.
"Falling euro area sentiment suggests that the slowdown may be more broad based than we were expecting initially, with activity in the manufacturing and services sectors, as well as consumer spending, slowing," said Credit Suisse analysts.
"We expect the European Commission surveys to reflect such developments," they said, predicting particular weakness in the services reading.
The overall economic confidence reading is seen declining to 104.2 from 104.7 in December, reflecting declines in each of the components (industrial, services and consumer confidence).
Italian producer prices are expected to moderate slightly in December, with monthly growth of 0.2 pct from November s 0.9 pct rise, and the annual rate unchanged at 4.6 pct.
FRIDAY, FEB 1
PMI readings of activity in the manufacturing sector in January are expected to show further moderation, but should still be marginally expansionary.
Germany s reading is seen dipping to 53.1 from 53.6 in December, while France s reading is expected to moderate to 53.6 from 53.8. Italy is seen at 50.2, from 50.7.
The final euro zone PMI manufacturing reading is not expected to change from the first estimate of 52.6.
"Although exports to emerging markets remain strong, demand from the US and the UK is waning, whilst domestic demand is steady but not expanding," said economists at Moody s Economy.com.
ALSO DUE DURING THE WEEK
- German CPI inflation in January is expected to be negative on the month due to base effects after a tax increase last year.
"Having risen sharply at the end of 2007, German inflation should drop back in January as base effects from last years rise in VAT push down core inflation," said Credit Suisse analysts.
The monthly change is seen at -0.4 pct, reversing December s 0.5 pct rise, while the annual rate is seen at 2.5 pct, down from 2.8 pct.
Meanwhile, the German harmonised HICP inflation rate -- used for comparisons with the rest of the euro zone -- should also be -0.4 pct on the month, partly reversing December s 0.7 pct rise.
The annual German HICP measure is seen at 2.9 pct in January, down from 3.1 pct in December -- still well above the ECB s target for the euro zone of around 2.0 pct.
- German retail sales are expected to rebound in January, with monthly growth of 2.0 pct following December s -1.9 pct reading. The annual deterioration, though, is expected to worsen to -4.1 pct from -3.9 pct.
alex.brittain@thomson.com abr/kf1 COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News. MMMM
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