The CAC index is showing little movement in the Tuesday session. The index is currently trading at 5191.80 and is down 0.10% on the day. On the release front, Eurozone PPI declined 0.4% in May, missing the estimate of -0.2%. The index has not posted a gain since February, underscoring weak inflation in the eurozone.
The watershed French election, in which voters have given President Emmanuel Macron’s En Marche party a resounding majority in parliament. There is a renewed feeling of optimism in the country, and recent indicators are pointing to stronger consumer confidence and spending levels. French consumer spending climbed 1.0% in June, easily beating the estimate of 0.5%. This marked the indicator’s strongest gain since January 2015. The solid manufacturing data points to stronger optimism in the business sector. The economy appears to be improving – a recent INSEE report revised upwards its estimate for France’s GDP for the first quarter to 0.5%, up from 0.4% earlier in June. Still, inflation levels remains mired at low levels, as underscored by French Preliminary CPI, which dropped to a flat 0.0%.
The annual European forum of central bankers is generally a non-event for the markets, but last week’s gathering was a significant market-mover. Both the euro and the pound recorded sharp gains, following hawkish remarks from ECB President Mario Draghi and BoE Governor Mark Carney. The euro jumped 2.0% last week, catching ECB policymakers by surprise. The bank tried to dampen market speculation about any imminent moves to withdraw stimulus, but the euro remains at high levels. Last week’s stampede to snap up euros has forced ECB policymakers to reassess whether what moves, if any, it will announce at the July 20 policy meeting. In June, the ECB removed an easing bias regarding interest rates, effectively closing the door to further rate cuts. However, after the Draghi rally last week, policymakers may be wary about removing a second easing bias regarding the asset-purchase program, to avoid another run on the euro. The ECB has repeated loud and clear that it will not remove QE until inflation levels are closer to the bank’s target of 2.0%, but Draghi may have learned the hard way at the ECB forum that the market is picking up a different message than what the ECB thinks it is sending. This could result in the ECB playing it safe and avoiding any meaningful discussion about QE at the July meeting, especially if the euro remains at high levels.
The Federal Reserve has given broad hints that it plans to raise interest rates three times in 2017, but the markets are becoming more skeptical. The odds of a rate hike in December have fallen to 47%, down from 53% last week, according to the CME Group. With the US economy giving a mediocre performance in the first quarter, and inflation levels remains low, there are Fed policymakers who are currently lukewarm to the idea of raising rates again this year. Key economic indicators have not looked particularly sharp in the second quarter, notably housing and consumer spending numbers. If inflation numbers do not improve and GDP reports for Q2 remain soft, the odds of a December hike will drop even further, which could translate into broad losses for the US dollar.
