3 Numbers To Watch: BoE And ECB policy Announcements, US Q3 GDP

Thursday is a day of big-picture news with the Bank of England (BOE) and the European Central Bank (ECB) issuing new monetary policy statements. The underlying economic profiles are a study in contrasts: Britain’s macro trend continues to strengthen while the Eurozone grapples with a wobbly recovery that appears to be threatened anew with disinflation/deflation. Nonetheless, both statements are expected to dispense identical results: no change in policy. Later, the US government publishes its first estimate of third-quarter GDP.

Bank of England Announcement (12:00 GMT): The economic news in Britain goes from strength to strength these days. The latest installment — yesterday’s report on industrial production for September, which beat expectations by a sizable margin. Output jumped 0.9 percent, or nearly twice the consensus forecast. Even better, the cyclically sensitive manufacturing component, which has been relatively soft lately, perked up with a strong 1.2 percent gain. The upbeat numbers are the latest in an ongoing run of encouraging data for the UK economy. But if you think that implies that the bank will favour a tightening of monetary policy today, think again.

“It is a stone-dead certainty that the Bank of England will keep interest rates at 0.50 percent and the stock of quantitative easing (QE) unchanged at GBP375 billion,” predicts IHS Global Insight. That’s also the consensus forecast. With no drama expected, today’s announcement will be picked over for clues about the next big event for the BoE: next week's quarterly inflation report and how, or if, the numbers will change from the August data.

Although consumer prices remained unchanged at 2.7 percent on an annual basis in the September report from the Office for National Statistics, house prices increased 3.8 percent for the year through August—the fastest pace in nearly three years. By some accounts, the pricing pressures will continue to bubble and perhaps force the BoE to tighten sooner than expected. Maybe, although there’s plenty of debate on this point at the moment.

BoE Governor Mark Carney last week said that “most of the growth in momentum is coming from the household sector and there's a pick-up in the housing market from quite low levels.” Yet he insisted that “we're not going to look to tighten monetary policy until we see real traction and momentum in this recovery that has been sustained for some time.” That begs the question: What’s “real traction and momentum” and how long is "some time"? Perhaps today’s BoE press conference will enlighten us.

European Central Bank Announcement (12:45 GMT): It’s still unclear if the Eurozone’s marginal recovery is destined to survive, but the hazards are clearly rising in the wake of last week’s news that annual inflation fell sharply in Europe to 0.7 percent in the flash estimate for October versus the previous month’s 1.1 percent (pdf). Even more striking is the downward trend compared to a year ago, when the annual inflation rate was 2.5 percent. The ECB’s inflation target, by comparison is two percent. Any way you slice it, the fade in the general change in prices is flashing a warning sign. The potential for a Japanese-like disinflation/deflation quagmire looms. The only question: When will the ECB act?

The crowd doesn’t think the answer will be with today’s policy announcement. Economists think that the ECB will leave its main policy rate unchanged. Even if the bank surprises the market with a rate cut, many analysts think that’s too little too late at this stage. One recommendation that’s making the rounds is the case for rolling out new or additional long-term loans to banks, which are loathe to lend these days, courtesy of the ongoing regulatory and market pressures to rebuild balance sheets and repair the lingering damage from the Great Recession. One potential lever is dropping the deposit rate (currently at zero) into negative territory, which would impose a charge on banks for holding funds at the ECB. The theory is that a new fee would inspire a higher level of lending.

But at this point it’s not clear what the ECB might do or when it might do it. But as the latest inflation numbers suggest, the time to act before the window of opportunity closes completely may be running short.

US Q3 GDP (13:30 GMT) Today’s initial estimate of third-quarter GDP will focus attention on the finer points of sluggish growth and how long it can go on without triggering deeper macro trouble. The consensus forecast sees an annualised two percent increase for the government’s “advance” estimate of Q3 GDP, which is in line with my econometric projection. That represents a downshift from Q2’s already moderate 2.5 percent pace. It wasn’t all that long ago that analysts warned that the US economy was flirting with “stall speeds” and so the recession risk was rising. But increasingly there’s a reluctant recognition to assume that sluggish growth can endure with big cyclical repercussions. Today’s GDP report is likely to provide yet another round of evidence on this front.

We’re almost at the point where slow growth as far as the eye can see is considered a permanent state of affairs. Sure, that’s an exaggeration, but only slightly. But the stock market doesn’t seem to mind—the S&P 500 is trading near all-time highs. By some accounts, the slow economy is good for business. Weak job growth has kept wages in check and the Fed’s ongoing preference to keep interest rates at unusually low levels has helped cut corporate costs on numerous fronts.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

In turn, corporate profits are at record highs. "Corporations have more market power than workers have and have kept wage growth to subdued levels," observes a Barclays economist. “That's left more for corporate profits.” The sight of slow growth in today’s GDP report will only boost the staying power of this dynamic. No wonder that there’s a growing number of investors who see sluggish growth as bullish for stocks.