This week, the main focus will be on monetary decisions by the two giant European central banks, the European Central Bank (ECB) and the Bank of England (BoE) amid their efforts to shore up European economies from the undergoing debt crisis and sluggish global growth.
Starting first with the ECB, expectations are in favor of seeing a hold in interest rate at its low level of 0.75% to reinvigorate the economy that fell back into recession after contracting for two consecutive quarters from March to September as the lingering debt crisis continued to weigh on growth and confidence.
With negative growth, elevated unemployment levels and near-target inflation, the bank has to do its utmost effort to bolster the economy before the economic situation worsens further.
European PMI composite (final reading) is estimated to remain unrevised at 45.8 in November, in other words, a contraction in both manufacturing and services for the 10 th consecutive month in November.
ECB President Mario Draghi said last month the economy will remain weak in near term as growth risks still on downside, where growth momentum to stay weak in 2013 as economic outlook is being revised.
"As regards second half, available indicators continue to signal weak activity,” Draghi said revealing that balance sheet adjustments will weigh on outlook.
However, the option of seeing another round of cheap loans is not likely to be seen and the like for the ECBs new bond-buying program announced in September, especially as since its announcement borrowing costs in European hotspots, more specifically Spain and Italy, began to stabilize.
Both Spain and Italy had announced that they completed all the funds needed for 2012, where the upcoming auctions are all for 2013 financial requirements, lowering the chance of tapping the ECBs OMT program this year.
Eyes will track a bond selling by Spain as it auctions 2015, 2019 and 2022 bonds, referring that the most recent auctions had witnessed a drop in yields, especially after last weeks Greek debt deal clinched between eurogroup finance ministers and the IMF.
Moving to the U.K., the situation is not similar to the euro zone yet the bank will probably hold monetary policy for another month, waiting for the beginning of the New Year to change its monetary policy according to the latest development in the situation in the U.K. and the euro area, U.K.s main trading partner.
The BOE is predicted to hold interest rate at 0.50% and APF at 375 billion pounds, especially after the British economy managed to get out of recession in third quarter after recording a robust 1% expansion and as inflation rebounded sharply to 2.7% in October from 2.2% in September.
Signs of improvement appeared in the third quarter with hopes it would continue in the last quarter. PMI manufacturing for Nov. will ease contraction to 48.0 from 47.5 while services to widen expansion to 51.1 from 50.6, according to median forecasts.
However, BoE King said last month GDP will continue in a zig-zag pattern as output is likely to fall sharply in the fourth quarter since the robust 1% growth was underpinned by temporary factors.
His main conclusion is that “we face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while.”
The BOE had lowered its growth forecasts for next year to 1% as risks from the euro area have heightened.
Minutes of Novembers decision did not show a unanimous vote to holding APF as MPC member David Miles preferred to increase the size of asset purchases by a further 25 billion pounds to a total of 400 billion pounds.
Yet, for the bank to avoid further inflationary pressures it will probably avoid more quantitative easing and depend on its FLS program which is aimed to beef up credit to companies and households.
BoE will publish for the first time this week a quarterly data showing each group participating in the FLS, the amount borrowed by the BOE, and the net quarterly flows of lending to U.K. households and firms.
The economy is facing a daunting challenge next year as it aims to boost the economy while have to continue adopting sharp austerity measures to cut budget deficit, which will make all eyes track U.K. Chancellor of the Exchequer Osborne this week when he makes his autumn statement on the economy and government finances in the House of Commons.
Osborne will give an outlook about the economy while may cut growth prospects and announce an additional year to 2018 to reach deficit target.