Market movers today
Focus continues to be on Scandinavian inflation with release of the Swedish figure for April. We estimate inflation took a leap up, above the Riksbank’s estimate due to seasonality in the price of travel but this should be temporary. See more on page 2.
The European Commission is set to publish its updated economic project ion and we will keep an eye on its estimate of the structural unemployment rate (NAIRU) , as this is highly important for when wage pressure will pick up. In our view, NAIRU in the periphery count ries is likely to be revised lower as it is current ly estimated to be higher than prior to the financial crisis despite the labour market reforms in these count ries.
In the afternoon, at tention turns to the Bank of England (BoE) meeting, which includes policy announcement , minutes, the Inflation Report and a press conference. We do not expect any policy changes; hence, the interest ing part will be the policy stance after the neut ral stance was maintained but included a hawkish twist at the latest meeting. We expect the BoE to remove this hawkish twist again as GDP growth slowed to 0.3% q/q against its nowcast of 0.6%. Note that yesterday we published a strategy piece about the upcoming UK election.
Brent oil is back above USD50/bbl and the market will focus on the release of OPEC’s monthly oil market report. In particular, it will look for details on the level of compliance to the output cut deal as well as comments on the potent ial extension of cuts in H2.
Selected market news
Yesterday, Mario Draghi said th e ECB’s forward guidance was meant to address tail risk and some tail risks are less and less probable. This could point to a removal of the ‘or lower levels’ phrase in the forward guidance on policy rates wit hin the near future , which is likely to have considerable market implicat ions both from a fixed income and FX perspective. However, an aggressive price action does not seem to be what the ECB wants as it argues continuously about the need for favourable financing conditions in bringing underlying inflation pressure higher. See ECB research: Hawkish wording but changed forward guidance less likely, 10 May.
Apart from the comment above, Draghi had a fairly dovish tone during yesterday’s speech, reiterating previous comments about the lack of underlying price pressure due to slack in the labour market. Note that yesterday, the ECB published a piece where it concluded that the labour market slack currently affects 15-18% of the euro area extended labour force, which is almost double the level captured by the actual unemployment rate at 9.5%. According to the ECB, this is likely to continue to contain wage dynamics.
In the US, Kansas City Fed finds that a USD675bn reduction in the Fed’s bal ance sheet over two years is about equal to a 25bp rate hike in the Fed funds rate. At the upcoming June meeting, we believe the Fed will announce what conditions would t r igger a change in its current reinvestment strategy followed by an actual quantitat ive tightening (reduct ion in the balance sheet ) start ing in Q1 18. See FOMC review: Fed thinks weak GDP growth in Q1 was ‘transitory’, 3 May.
