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French and German PMIs point to a problem for the ECB

European markets have got off to a mixed start this morning ahead of today’s European Central Bank meeting. This will be the first meeting since the bank curtailed its asset purchase programme at the end of last year. In terms of market timing, and the slow decline of economic data over the past few months, it's hard to make sense of the logic behind the bank's thinking in this regard.

At last month’s press conference ECB president Mario Draghi acknowledged that the banks QE programme had been the only driver of recovery in certain parts of the area, which makes the current guidance that rates might rise by the end of the summer almost seem reckless. It can’t be a coincidence that markets in Europe topped out in the middle of last year at precisely the time the ECB started talking about the prospect of looking at implementing an exit policy of ending QE and then raising rates.

The governing council will have to acknowledge the continued deterioration in the economic outlook by adjusting down its growth and inflation outlook. Even keeping the prospect of a rate rise on the table at this point in time would be tantamount to recklessness, irrespective of what German ECB board member Sabine Lautenschläger would have us believe, when core inflation is sitting at 1%, a level that it has sitting around for over five years, something that won’t have been helped by the sharp fall in oil prices since October Since April 2013 core inflation in the euro area has never been above 1.2%.

Today’s press conference is likely to be instructive in terms of what policy support the ECB can offer now that its asset purchase programme has ended, which means we are likely to get some questions of whether the ECB will look at new TLTRO programs to help improve liquidity in the European banking system. Whatever the outcome of today’s meeting the likelihood of a move higher in rates this year has undoubtedly been pushed well into 2020, unless ECB members haven’t learned the lessons of 2008 and 2012, when they mistakenly pushed up rates, only to have to cut them again soon after.

This morning’s flash French and German manufacturing and services PMI’s for January illustrate quite starkly the ECB’s problem with French services PMI sliding sharply to 47.5, a five year low, though manufacturing did improve to 51.2 from 49.7. It can be argued that the gilets jaunes protests may well have played a part in this fall, which could mean that we may see a rebound in the coming weeks.

In Germany the numbers for manufacturing showed a slide into contraction of 49.9, lowest since June 2013, though services did improve to 53.1, but that can’t hide the fact that Europe’s two biggest economies are struggling. It will be difficult for the ECB and President Draghi to ignore that.

Vodafone shares have slid sharply this morning in the wake of a disappointing update from its Vodacom unit in South Africa which has seen revenues decline 0.9%, as a result of falling sales.

The recent volatility in global markets doesn’t appear to have stopped wealth management group St. James Place from adding net inflows of £2.6bn for Q4, with group funds under management up 5% on the year to £95.6bn. Market expectations had been for slightly higher inflows however recent market volatility has meant that investors are understandably more cautious.

The numbers still contrast with a number of its peers which have seen net client outflows in the last quarter as a result of the big declines that we saw in Q4.  

Management of Restaurant Group raised a few eyebrows last year when they paid £550m for rival food restaurant Wagamama, at a time when the sector is undergoing significant cost pressures from rising wages and a more discerning consumer. The owner of Frankie and Benny’s has found itself at the forefront of speculation that it may have bitten off more than it can chew as short sellers pile in to bet against the business.

The shares have slid over 20% since the highs in October and while we’ve seen a modest rebound, 2019 is likely to be much more challenging than 2018. For the moment the omens look positive with Wagamama seeing a 10% rise in like for like sales at the beginning of this year, while this morning’s pre trading update showed that like for like sales declined 2% over the last 52 weeks. Total sales showed an increase of 1%, though that number included only one week of trading from Wagamama, so the benefits or otherwise of the recent acquisition will only start to be seen in the next financial years numbers.

The company said it had performed well since the World Cup in the summer with decent sales growth comparatives across the business, while reiterating that it remained on course to meet market expectations on profits for the current financial year.

US markets look set to open slightly lower after yesterday’s move higher on the back of strong numbers from IBM and Proctor and Gamble.

Shares in focus are set to include Ford who reported numbers who missed profit expectations on the back of higher costs, as the company continues its restructuring process, though revenues beat forecasts, coming in at $38.7bn. Losses in Europe and overseas markets continue to act as a drag on profits.

Microsoft’s ability to re-orientate its business model away from its Windows suite of products has been one of the success stories of the last few years, as it looks to update the market on its Q2 numbers. The success of Azure, its cloud computing services division as well as Office 365, saw revenues rise 47% in Q1, while margins also increased as well. It still remains behind Amazon in its cloud business and there is some evidence that the pace of revenue growth is slowing, however sales from its computing and gaming division has helped offset some of this, with Xbox console sales driving some of the strongest gains. On the gaming side the upcoming Q2 sales will cover the Christmas period which generally tends to be a good period for technology companies as discretionary spending tends to spike. Expectations are for profits of $1.09c a share, slightly down from the $1.14c seen in October.

Apple shares are also set to be in focus on reports that the company has cut 200 jobs in Project Titan, its autonomous vehicle group. While some of these changes may not be unexpected given that Apple recently hired Doug Field from Tesla to lead the Titan team the move will no doubt invite further speculation about how Apple intends to develop this side of the business, in terms of whether they intend to go down the vehicle track, or merely develop the software to put in them. It could also prompt further speculation about an Apple bid or merge with Tesla which had been doing the rounds in the middle of last year.

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