Market movers today
Focus today will be on inflation in the US and Germany, which will provide an important gauge of the underlying inflation pressures after a couple of months with volatile readings due to the timing of Easter.
In the US, the PCE inflation data for April is released. After the weak CPI report earlier in May, we estimate that PCE core rose 0.1% m/m, implying a core inflation rate of just 1.4% y/y (a decline from 1.6% in March).
As a prelude to the highly important CPI release for the whole euro area economy tomorrow, German inflation figures are released today. In line with our expectation, markets expect them to fall back in May versus April.
In Sweden, the main event this week is undoubtedly 2017 Q1 GDP data released today. We expect growth to come in at around 2.5% y/y (calendar adjusted) which is well in line with our exanteforecast . In Norway we have retail sales (for more details see page 2).
Selected market news
Yesterday, the market kept a close eye on the Draghi hearing for monetary policy clues ahead of the 8 June ECB meeting. But Draghi stuck to the party line saying that " Despite a firmer recovery, and looking through the volatile readings in HICP inflation over recent months, underlying inflation pressures have remained subdued. Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective. For domestic price pressures to strengthen, we still need very accommodative financing conditions, which are themselves dependent on a fairly substantial amount of monet ary accommodation". Draghi added: "We remain firmly convinced that an extraordinary amount of monetary policy support , including through our forward guidance, is still necessary for the present level of under-utilized resources to be re-absorbed and for inflation to return to and durably stabilize around levels close to 2 percent within a meaningful medium-term horizon".
Hence, there was no sign that the ECB is about to make a U-turn despite the better economic data from the euro zone. We continue to hold the view that the ECB will deliver a relatively dovish message next week and importantly keep the commitment to low or " lower" rates.
Following the French election and the strong support for Merkel’s CDU in t he German ländern elect ions, we have seen less focus on European politics and instead the focus has moved back to the Trump administration. However, yesterday Italy came into the spot light once again. 10Y Italian government bonds lost 12bp to Germany after former prime minister Mat teo Renzi suggested on Sunday that Italy’s next election should be held in September around the same time as Germany’s, saying that this would reduce market uncertainty about Italy, not increase it. The fixed income market obviously did not agree. Given that the media also reported that an agreement on the Italicum (electoral reform) is getting closer, a snap election in the autumn has become more likely. Most political analysts until recently had looked for elections to take place early in 2018. The Italian bond market could potentially be in for a volatile summer.
