The European Central Bank adopted a simple 2% inflation target, with investors’ attention now turning to the Q2:2021 earnings season
The European Central Bank has unanimously approved a new monetary policy strategy. The last review was in 2003, while the next assessment is expected in 2025. On the quantification of the inflation aim, the Governing Council adopted an unequivocal symmetric 2% inflation target over the medium term, replacing the vague “below, but close to, 2%”.
When the effective lower bound (ELB) on nominal interest rates is binding, the ECB will respond to negative shocks with forceful and persistent policies. This may also imply a transitory period in which inflation is moderately above 2%. Unlike the Federal Reserve, however, the ECB will not implement flexible average inflation targeting. Bygones are bygones.
Investors’ attention will now turn to the ECB meeting, due on July 22nd. President Lagarde noted that forward guidance on interest rates and asset purchases should be revisited, as the ECB will try to map the changes in the policy strategy to changes in the current policy stance.
Equally importantly, the ECB has committed, through 2024, to incorporate climate-change considerations into its policy framework, including in the areas of disclosure, risk assessment, collateral framework and corporate sector asset purchases.
The minutes of the June 15th & 16th Federal Open Market Committee (FOMC) meeting revealed that a more detailed discussion regarding tapering of large-scale asset purchases took place, stating that conditions could be met “somewhat earlier-than-expected”. Note that since April, the gap between Fed purchases and Treasury net issuance has significantly narrowed pressuring, inter alia, long-term nominal yields.
FOMC officials view the risks to the outlook for economic activity as broadly balanced, expecting real GDP growth to decelerate in 2022 (3.3%) and 2023 (2.4%), from 7% in 2021, albeit remaining above trend.
Regarding inflation, a substantial majority of officials (13/18) judged that the risks to their PCE inflation projections were tilted to the upside in 2022 (2.1%) and 2023 (2.2%), from 3.4% in 2021. Note that CPI rose by 5.4% yoy (0.9% mom) in June from 5% yoy in May, while core CPI surged by 4.5% yoy (0.9% mom) -- highest since 1991 -- from 3.8% yoy in May.
G20 leaders endorsed components of an international tax plan, that was agreed by 131 countries under the auspices of the OECD on July 1st. Negotiations are expected to be concluded in October and the implementation to begin in 2023.
The People’s Bank of China (PBC) reduced the Required Reserve Ratio by 0.5 percentage points to 8.9% (weighted average of all financial institutions) in order to unleash about 1 trillion RMB (USD 154bn or 1% of Chinese 2020 GDP) of liquidity into the economy (Q2:2021 GDP is due on Thursday).
The US companies’ earnings season kicks-off this week, with JPMorgan and Goldman Sachs. Consensus estimates for S&P500 Q2:2021 EPS growth stand at +64% yoy. Full-year EPS growth is expected at 36% ($190) and 2022 at 11% ($211).