Investor attention turns to the Fed and ECB meetings
The Fed is expected to raise the federal funds rate target by 25 bps, to 1.75% - 2.00% at its meeting on June 13th. Investor focus will be on the FOMC participants’ estimates (“dots”) for the path of the federal funds rate.
Regarding the ECB, Chief Economist Praet delivered a hawkish message in the past week, expressing increased optimism regarding the criteria for a Sustained Adjustment in the Path of Inflation (SAPI).
Mr Praet cited above trend GDP growth (consensus for 2018 real GDP: +2.3% yoy) and improved trends for wages, with negotiated wages in the euro area accelerating to +1.9% yoy in Q1:18 versus +1.6% yoy in Q4:17. He also commented on the resilience of inflation expectations (5Y/5Y to 1.75%) despite diminishing prospects for a sizeable further expansion of the Asset Purchase Programme (APP) beyond December 2018.
The ECB is expected to debate the gradual unwinding of the APP at its meeting on Thursday 14th (currently: €30bn per month, up to September 2018), and there is a high probability that the ECB will announce the end of QE (December 2018), following purchases of €15bn per month in Q4:2018.
The outlook for international trade policies remains uncertain, as the G-7 Summit on June 8 – 9 (comprising the US, Japan, Germany, UK, France, Italy and Canada) exhibited divisions between the US and major trade partners. Moreover, the US is expected to announce import tariffs on $50 bn worth of Chinese imports on June 15th as well as Chinese inbound investment restrictions and enhanced export controls on June 30th.
Global equities rose in the past week (MSCI World: +1.2% wow), mainly due to US equities, with the S&P500 at +1.6% wow. The EuroStoxx continued to perform weakly (-0.2% wow), mainly due to a decline in Italian equities by 3.4% wow. Recall that the EuroStoxx has underperformed the S&P500 by 4.5% since mid-May, due to a combination of stronger economic data in the US and political uncertainty in Italy.
On Monday, however, pressure on Italian assets eased, following comments from the Italian finance minister, G.Tria, who underlined the administration’s determination to avoid any actions that would undermine Italy’s participation in the euro area (BTP/Bund spread: -34 bps to 235 bps | FTSE MIB: +3.4% | Banks: +5.8%).
Italian government bonds were also under pressure in the past week, due to the prospect of the ECB ending QE. Recall that the ECB is a major holder of Italy’s government bonds (€370 bn | 19% of total Italian Government Bonds).
The hawkish ECB commentary lifted the euro (+0.9% wow against the US Dollar to $1.177) and also led to higher Bund yields, with the 10 year tenor up by 6 bps to 0.45% (see page 11).